Enviva Inc. (EVA) Q2 2022 Earnings Call Transcript

Enviva Inc. (EVA 20.67%)
Q2 2022 Earnings Call
Aug 04, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Enviva's Inc. second quarter of 2022 earnings conference call. [Operator instructions] Please note that 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 -- Vice President, Investor Relations

Thank you. Good morning, everyone, and welcome to Enviva Inc.'s second quarter 2022 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, chairman and chief executive officer; Thomas Meth, president; and Shai Even, executive vice president and chief financial officer.

Our agenda will be for John, Thomas and Shai to discuss our financial and operational results and provide an update on our current business outlook and operations. Then we will open up the call for questions. During the course of our remarks and the subsequent Q&A session, we will be making forward-looking statements, which are subject to a variety of risks. Information concerning the risks and uncertainties that could cause our actual results to differ materially from those in our forward-looking statements can be found in our earnings release, as well as in our other SEC filings.

We assume no obligation to update any forward-looking statements to reflect new or changed events or circumstances. In addition to presenting our financial results in accordance with GAAP, we will also be discussing adjusted EBITDA and certain other non-GAAP financial measures pertaining to completed reporting periods, as well as our forecast. Information concerning the reconciliations of these non-GAAP measures to their most directly comparable GAAP measures and other relevant disclosures is included in our earnings release. It is important to note that as a result of our simplification transaction that we announced on October 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 nonrecast basis depending on the reference point. Please refer to our earnings release and the Form 10-Q document for more details on our recast and nonrecast presentations. I would now like to turn the call over to John.

John Keppler -- Chairman and Chief Executive Officer

Thank you, Kate. Good morning, everyone, and thanks for joining us today. As you saw in our press release and 10-Q filed yesterday, the last few months have been a particularly productive and exciting time for Enviva. Since we were last together, we've had the opportunity to meet with a broad spectrum of our current investor base and new investors as well.

In these meetings, in spite of the remarkable progress and results we have delivered in the now more than seven years since our IPO, I'm consistently reminded that Enviva remains a show-me story. That's because there just aren't any pure-play publicly traded comps like many other industries have. And even with our track record of significantly outperforming benchmark indices like the S&P 500 and the MSCI ESG Index and the Russell 1000 over the past one year and three-year periods, there still aren't any companies like us in almost any industry with anything close to our long-term contracted revenue base, our durable cash flow and dividend, our strong growth profile, ESG attributes and margin expansion opportunities across a wide range of economic and business cycles. That's what makes us unique.

But it also means we need to continue to do a good job communicating what's going on in our business, what we expect to happen, given the actions we're taking and the investments we are making and then consistently reporting back on how well we are doing with keeping those promises. So if we look back at our last conversation together, we described three important things we expect to deliver this quarter. First, we said we expected that we would continue to make good progress improving our operating profile and cost position coming out of a challenging first quarter. In our brief flash to the market about six weeks ago, we reinforced just that, highlighting that we expected Q2 to deliver adjusted EBITDA in the range of $35 million to $40 million.

And today, we are pleased to report that based on improvements we realized in both production and cost, we delivered results at the top end of that range and set the stage for a very significant back half of the year. Second, we outlined the increasing production ramp at our newly commissioned and fully contracted Lucedale pellet production plant and increasing shipments from our new deepwater marine terminal in Pascagoula, Mississippi. Both of these remain on track and are a big part of the projected EBITDA uplift in the latter part of this year. We also talked about starting construction on our Epes, Alabama plant and our ability to potentially access new sources of debt capital to finance fully contracted plants like this.

Well, Epes is now in construction with ground clearing, civil work, site prep and major equipment deliveries beginning to commence. We have also filed the air permit application for our next plant in Bond, Mississippi. And in the midst of some pretty significant capital markets volatility, we were able to tap the tax-exempt bond market for a $250 million issuance with a 10-year tenor, priced attractively at 6% inside our prior long-term notes, reducing our cost of capital. That's a strategy and structure that is replicable for us, and we have already received a similar inducement agreement giving us confidence that we will be able to access the tax-exempt market when appropriate for our Bond, Mississippi facility.

Finally, we described the progress we expected to continue to make, executing new long-term offtake contracts and our expectations about converting existing MOUs and LOIs to binding contracts. Today, we are very pleased to announce the signing of four new contracts across a broad range of both utility and industrial counterparts that do exactly that and ultimately could add over 8 million metric tons of new demand, with contracts that range in duration from five to more than 15 years. What we did not expect to realize as quickly as we have, is the substantial increase in pricing that we have been able to secure both within our current contract portfolio, given our pricing escalation and pass-through provisions, as well as the increasing willingness and ability to pay higher prices from our new and growing customer set, who face an even more challenging pricing environment given the limited alternatives available for stable fuel supply and low carbon substitutes. It's important to note that the constructive market conditions from which we are benefiting today are translating into permanent margin improvements for us.

And that's happening at the same time that we're seeing our overall cost tower come down. We are benefiting not only from enhanced purchasing power as we expand in size and scale, but we are also unlocking value from taking advantage of existing operational leverage within our asset base. And as expected, we are seeing fixed cost absorption rates improve in tandem with increased production. And should we find ourselves in a period of global economic contraction that reduces cost for labor, steel, trucking and consumable goods, we stand to not only maintain, but truly strengthen our operating position and financial results.

Focusing in on what you expect for the rest of 2022. You will recall from our previous discussions that the first quarter of the year is typically our seasonally softest quarter. And thus, the first half of the year usually represents about a third of our earnings for the year. The fourth quarter is typically our seasonally strongest quarter with the back half of the year representing about two thirds of our earnings.

And we are set up for what we expect to be a record fourth quarter, both in terms of EBITDA and margin per ton. Given this advantaged backdrop, we are reaffirming our adjusted EBITDA guidance for 2022 in the range of $230 million to $270 million and our 2022 dividend guidance of $3.62 per share, which represents a 10% increase over 2021. And we see a clear path to further increasing return of capital to shareholders over time, especially as we continue to project EBITDA for 2023 in the range of $305 million to $335 million and project that 2024 could achieve a further 25% uplift over that range. Enviva is a rare combination of a pure-play ESG company with a growth trajectory and a dividend yield that are both in the 90th percentile of the S&P 500 companies.

We are the largest global player in an industry where the total addressable market is rapidly expanding and new use cases for our products continue to emerge. We are virtually unmatched in terms of the fully contracted nature of our business in the highly visible and durable cash flow growth that our business generates, as well as the truly remarkable growth prospects ahead of us. I'll come back to give an update on our asset expansion plans and kick off our Q&A session. But first, I'd like to turn it over to Shai to discuss our financial highlights and then to Thomas to give some important color on our market and contractual developments.

Shai Even -- Executive Vice President and Chief Financial Officer

Thank you, John, and good morning, everyone. We generated net revenue of $296 million for the second quarter of 2022 as compared to $286 million for the second quarter of 2021 on a recast basis. Net revenue increased by 4% year over year, driven primarily by an increase in our average sales price per ton as a result of annual price escalators in our contracts, as well as elevated pricing environment for biomass. Enviva was able to help address specific dislocations in our customers and other producers supply chains during the second quarter of 2022, rescheduling certain contracted deliveries into future periods, which enables pump deliveries to other customers requiring incremental deliveries at elevated pricing.

Recent biomass market prices, as well as the forward curve pricing of certain European biomass indices have exceeded $300 per metric ton, which represents a substantial premium to the current long-term contracted pricing of roughly $200 to $220 per metric ton across Enviva's weighted average portfolio, and we were able to capture some of that differential during the second quarter of 2022. Even with biomass spot market prices being roughly double now versus this time last year, biomass is the cheapest form of thermal energy generation in Europe with biomass being more affordable than coal, natural gas and crude plus EU ETS carbon pricing, not only in today's market, but all along the forward pricing curve. Biomass compelling economics are certainly providing a strong tailwind in our current contracting environment. Pivoting back to our quarterly results, we did exit the quarter with higher-than-average finished product inventory, simply due to the timing of two shipments.

The ships were loaded in early July as opposed to late June, thus pushing the revenue into the third quarter of 2022. Adjusted gross margin for the second quarter of 2022 was $54.8 million, which represents an increase of 6% as compared to $51.7 million for the second quarter of 2021 on a recast basis. Adjusted gross margin per metric ton was approximately $43 per metric ton, which represents an increase of close to 14% as compared to $37.90 for the second quarter of 2021 on a recast basis. The increase in adjusted gross margin and adjusted gross margin per metric ton was driven primarily by contract price escalators that are tied to inflation indices, coupled with our ability to deliver a few shipments at market prices.

We are securing material durable pricing uplift from our contract structure in addition to being in a very favorable contracting environment. These pricing tailwinds are expected to continue driving margin expansion on a go-forward basis. Net loss for the second quarter of 2022 was $27.3 million as compared to a net loss of $24.9 million for the second quarter of 2021 on a recast basis. Adjusted EBITDA for the second quarter of 2022 was $39.5 million compared to $25.7 million generated for the second quarter of 2021 on a recast basis.

In June, we shared with the market that we expect adjusted EBITDA for the second quarter of 2022 to be in the range of $35 million to $40 million. And as John mentioned, we are pleased to have achieved the high end of that range. Distributable cash flow was $21.3 million for the second quarter of 2022 as compared to $5.7 million for the corresponding quarter in 2021 on a recast basis. Our liquidity as of June 30, 2022, which included cash on hand, cash earmarked for the financing of our Epes plant and availability on our revolving credit facility was $184 million.

Our liquidity at the end of the quarter does not include the proceeds we received from the tax-exempt green bonds we issued in the middle of July. We are pleased with our recent green bond issuance, which represents the first time Enviva has accessed the municipal bond market. Even in a challenging prolonged period of capital market volatility, we successfully raised $250 million of 10-year tax-exempt green bonds at a 6% rate to fund our Epes, Alabama plant build. We expect that the municipal bond market could provide an attractive financing option for future greenfield projects as well.

For example, the Mississippi Business Finance Corporation has recently approved an endorsement resolution, which provides us with the opportunity to consider financing a portion of our next plant build in Bond, Mississippi with tax-exempt green bonds. Stepping back to look at full year 2022, we reaffirmed our guidance ranges in yesterday's press release, and as John mentioned, we expect a strong back half of the year to generate over two thirds of our 2022 adjusted EBITDA. Based on what we know today, we are projecting adjusted EBITDA for the third quarter to be roughly 50% higher than the second quarter, and we are projecting record results for the fourth quarter of 2022 such as the fourth quarter could alone represent 40% of our 2022 adjusted EBITDA. Our commitment to conservatively managing Enviva's balance sheet remains unchanged, and we continue to target a leverage ratio of 3.5 times to four times based on our credit facility.

Although, as we execute our growth plan, we may exceed that range for a particular quarter or so but we will always manage back to that range, and for full year 2022, we expect to exit the year below four times. From a dividend coverage perspective, over the long term, we are targeting a robust dividend coverage ratio of 1.5 times, and we focus achieving that target in 2025. With that, I would like to turn it over to Thomas.

Thomas Meth -- President

Thanks, Shai, and good morning, everyone. It's great to be participating on today's call, and I'm pleased to share some exciting developments on both market side and our contracting progress. Let's start with the new slate of contracts we've signed. Yesterday, we announced the signing of four contract additions, including the conversions of a previously announced MOU and an LOI into binding take-or-pay contracts.

In our prior communications, we outlined the plan to bring several of these agreements across the finish line over a three- to six-month period. But given the urgency of our customers to not only decarbonize their operations, but also lock in a secure, reliable supply of low-carbon feedstock, we are seeing an unprecedented pace of contracting right now. The MOU we converted is with a European industrial customer who is using our product to replace lignite coal and natural gas used in their operations, which span across Europe. Initial shipments over the 15-year term are expected to start next year with planned volumes ramping to approximately 600,000 metric tons per year by 2031.

Just for context, this one contract represents the annual production volume from our Greenwood, South Carolina plant, so a really nice slide of additional contracted growth. The second contract we announced yesterday was the conversion of a letter of intent we announced back in May with the German industrial customer that intends to use our product to generate green process heat in their manufacturing facilities. This contract is for 10 years for approximately 60,000 metric tons per year, with deliveries expected to start in the coming weeks. The third contract we announced is with a new customer in Germany, where our pellets will be used in thermal heating systems.

This contract is for five years with deliveries starting later this year and with volumes expected to be around 150,000 metric tons per year. The fourth and final agreement we announced is with a long-standing EU-based customer. In consideration for additional delivered volumes under our existing contract term, we and our counterparty agreed to reprice volumes under this agreement at terms more reflective of the current environment. This is a great example of our current customer base wanting to secure incremental supply in a structurally short market and given market conditions and a long-term perspective that dramatically improves their ability to pay, customers are willing to enable to collaborate with us to achieve a win-win outcome.

Under this specific new agreement, we expect to deliver an incremental 720,000 metric tons through 2027, largely from volumes produced from our upcoming production capacity expansions across the Southeast U.S. These contract additions, as well as some incremental repricing in our existing contract portfolio are being executed at a significant premium to our historical weighted average contract prices, reflecting the value of our customers place on secure long-term affordable low-carbon feedstocks and the essential progress we all need to make in the large-scale decarbonization efforts of utilities and hard-to-abate industries. It's important to note that we remain keenly focused on fulfilling our long-term supply commitment. And today's strong pricing and contracting tailwinds are incentivizing our team to explore all options available to accelerate capacity expansions across our fleet.

There are limited alternatives available to our customers, and with carbon and fossil fuel prices remaining at elevated levels, customers are willing and able to commit long term to higher prices for biomass. Let's turn now to a few notable updates on the market. As many of you know, the European unit is in the process of updating their renewable energy directive legislation, which establishes common rules and targets for the development of renewable energy across all sectors of the economy to help the EU reach its ambitious energy and climate goals. Currently, bioenergy accounts for almost 60% of the renewable energy used in Europe, and we are encouraged with the direction in which the legislative process is headed.

We believe that the final legislation will ultimately continue to support the essential role of sustainable bioenergy as a key climate change solution and will remain consistent with Enviva's practices. I'll note that not only is it exciting to have just announced four new contracts with European counterparties, but these contracts also underscore the confidence our customers have in the EU's ongoing support for biomass as a critical pathway to achieving climate change goals. Getting a little more granular for a moment, one of the key industrial verticals that is attracting significant regulatory support on a global scale is sustainable aviation fuels. Less than a year ago, the world's airlines adopted bold policy initiatives such as refuel EU, the U.S.

Renewable Fuel Standard and the U.S. Sustainable Skies Act to achieve net zero carbon emissions by 2050. Most recently, the European Parliament voted to adopt draft rules to require SAF to account for at least 85% of EU aviation fuel by 2050. Similarly, the U.K.

announced the introduction of an SAF mandate requiring at least 10% of jet fuel to be produced sustainably by 2030. Additionally, the International Energy Agency's World Energy Outlook 2021 report notes that biofuel is expected to account for approximately 15% and 40% of total aviation fuel in 2030 and 2050, respectively. And just last week here in the U.S., a deal was struck, by a set of Democrats, which includes a biodiesel tax credit and a new SAF incentive. We currently have two customer agreements relating to the production of biofuels, one in Europe and one in the U.S., who are progressing plans to commence operations in 2023 and 2024, and with the current regulatory support, coupled with the scaling up of low-carbon transportation fuels refining capacity, we're nearing the inflection point whereby we can fundamentally change the carbon footprint of flying.

Enviva is well positioned to play an important role in the large-scale decarbonization of transportation fuels as our wood biomass product with a proven low carbon feedstock into the production process of biodiesel biomethanol and SAF. And before I turn it back to John, I'll give a quick update on the progress we're making in Taiwan. It was around this time last year that we began to build a sales presence in Taipei, and that investment is certainly paying off. Recently, Taiwan's state-owned electricity company, TaiPower, announced plans to convert a large coal-fired unit of the Hsinta power plant to biomass in order to meet the Taiwanese government's policy objectives around increasing the amount of renewable energy generation.

The project is scheduled to produce about approximately 3,000 gigawatt hours of renewable energy after 2025, which translates into demand for roughly 1.8 million to 2 million metric tons of biomass annually. Given Enviva's size, scale and track record with deliveries into the Asian market, we expect to be an important partner in TaiPower's biomass supply chain. And with that, I'll turn it back to John.

John Keppler -- Chairman and Chief Executive Officer

Thanks, Thomas. As Thomas has highlighted, the increasing market opportunities for Enviva with high-quality counterparties across a range of use cases from renewable energy generation to the displacement of fossil fuel-based carbon in hard-to-abate industries has never been more robust and the pace of contracting has never been this strong. Because our industry is persistently structurally short supplied, new contracts mean new capacity must get built. And thus, this unprecedented pace of contracting is in turn underwriting the acceleration of our capacity expansions.

As I mentioned earlier, we recently commenced construction of our plant in Epes, Alabama. Epes is 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. This fully contracted plant is expected to generate approximately $65 million in annualized adjusted EBITDA once the plant is fully ramped. We expect to complete construction of Epes in the back half of 2023, which gives us conviction in our projected significant step-up in adjusted EBITDA for 2024 as Epes ramps to its nameplate capacity.

We're also making swift progress on our plans to start construction of our plants in Bond, Mississippi. Bond is designed to be similar in size to our Epes facility, and we expect to begin construction in early 2023 with the completion date planned for the middle of 2024. Epes and Bond are the second and third plants in our growing Pascagoula cluster, and plans are underway for the cluster's fourth plant. One of the very attractive aspects to building out the Pascagoula cluster is the operational leverage we have at our deepwater marine terminal and the enhanced returns we expect to generate as we add new plants and increased terminal throughput.

We expect to make a decision on the site for our fourth Pascagoula cluster plant around the end of the year. Additionally, we have recently filed for a permit for an accretive expansion of our Ahoskie, North Carolina plant. We are planning to increase capacity at Ahoskie by 45%, subject to receiving the necessary permits. We continue to expect to add six new plants over the next five years with the likelihood that we'll add more after that.

Epes, Bond and the fourth plant in our Pascagoula cluster are the first three in our series of six. And next on our growth plan is the addition of three new plants across our Savannah, Wilmington and Chesapeake clusters. Before we open the call for questions, I'll give a quick recap of what we've discussed this morning. First, Enviva delivered results at the top end of our expectations for the second quarter of 2022.

And I'm pleased to report that many of the short-term challenges we experienced in the first half of the year are proving either transitory or manageable over time. Second, we reaffirmed our 2022 guidance range and expect to deliver a strong back half of the year, with the fourth quarter projected to be a record, in terms of both adjusted EBITDA and adjusted gross margin per metric tons. Third, we announced four new contracts, including the conversion of an MOU and an LOI to binding contracts, which reflect the strong contracting and pricing environment we're in. And finally, our contracting success is underwriting our next series of production capacity expansions, which we're projecting will drive an adjusted EBITDA CAGR of over 25% from 2022 through 2024.

The effort our team is putting forth day in and day out is remarkable, and we are on track to doubling the size of the company over the next five years. In the near term, as we look to close out 2022 successfully, Here's what you can expect from us. First, we will continue to ramp production and mitigate cost pressures to deliver a strong Q3 and a significant step-up over Q2. From there for Q4, we expect that the benefits of volume produced from Lucedale as it nears the completion of its ramp, combined with a higher headline pricing that we are beginning to realize, will enable us to post a record quarter both in terms of produced volumes and margin per ton, closing out our year within the expected range for adjusted EBITDA of $230 million to $270 million.

Along the way, we will look forward to reporting on our construction progress at Epes, as that new fully contracted plant begins to come out of the ground and also our design and permitting completion for the new Bond plant to follow. And the final site in the Pascagoula cluster, we expect to announce around the end of the year. Of course, in parallel, you can expect us to continue to convert MOUs and new opportunities in our sales pipeline into binding long-term contracts that capture the value of the strong pricing environment we're in. We are incredibly privileged to have the opportunity to continue to build a company and a unique platform that delivers real climate change benefits today at scale.

The world wants less carbon, more quickly and more cost effectively from secure sources and that's exactly what we offer. A lot of work ahead of us, but a lot to look forward to. And as I'm fond of saying, we're just getting started. Now, let's open up the call for questions.

Questions & Answers:

Operator

[Operator instructions] The first question comes from Jordan Levy from Truist Securities. Please go ahead.

Jordan Levy -- Truist Securities -- Analyst

Good morning, all and congratulations on the contract announcements [Inaudible] Maybe to start on the financial side, and Shai touched on some of this in his prepared remarks. But the conversion and so on. You've got a lot of investors who are new to the story and just getting up to speed on the history of the company. In our discussions, the impressive demand environment and the benefits of the growth plan are pretty clear.

But we get more questions around where the dividend stands in the context of the overall growth plan. So I wanted to see if we could just get your updated thoughts on the value and size of the dividend, maintaining that throughout the course of the growth plan and that sort of thing?

John Keppler -- Chairman and Chief Executive Officer

Jordan. Thank you. It's always good to connect and really appreciate the question. And of course, we're also very, very encouraged by the recent contract executions.

This is an important continued click-off measuring the growth in our business. Because each of these new contracts obviously underpins a fully contracted new long-term asset at very attractive investment multiples, which really drives not only our historical year-over-year EBITDA CAGR, but what we see going forward. If you do the math, that's a little bit north of about 25%. And so, as we described when we were initiating the simplification transaction and the conversion transaction, that 2022 is a transition year for us as we grow into a self-funding growth model.

And as part of that, of course, we've moved from being a master limited partnership. That was a partnership that increases dividend every single quarter since our IPO into one that flattened that out as we really moved into this transition year. And of course, the guide of $3.62 for full year 2022 represents a flat $0.905 dividend. We've always managed this business with a keen focus and really a commitment to stable and durable return of capital with the opportunity to grow that over time.

Certainly, the growth profile, and if you look at -- as we continue to grow in the out-year growth and our cash flow associated with it, I think it certainly gives us the opportunity to increase that dividend over time. But we feel very confident in the guide for 2022. And as we look at the acceleration of the growth plan of 2023 and 2024, we're going to be very mindful of our overall conservative leverage profile, but maintain our commitment to stable and durable return of capital over time.

Jordan Levy -- Truist Securities -- Analyst

And as a follow-up, maybe jump into the operational side. You've always been committed to fully contracting out the projects as you just mentioned before moving forward with them. Clearly, you've seen positive momentum on the demand side. So I just wanted to try and gauge where you all see line of sight today in terms of the greenfield and expansion projects that currently or could be fully contracted along with your overall confidence as it stands today on fully contracting the extent of the growth plan over the next few years?

John Keppler -- Chairman and Chief Executive Officer

Yes. As you know, Jordan, fully contracting our asset base and certainly before we ever turn a shovel of dirt, it's a golden rule for this company. We've done it since we founded the company. We've never deviated and we don't plan to now.

So when we talk about the -- certainly Epes being in construction, Epes fully contracted. The Bond facility being in construction at the beginning of next year, fully contracted. Our ability to announce the fourth plant in the Pascagoula cluster around the end of the year, we expect that to be fully contracted around that time as well. Of course, we just announced also an expansion of our Ahoskie facility.

We do believe -- and of course, given the overall contract backlog that we have today, also fully contracted. Great homes for every single ton of pellets we can possibly produce for the next 10, 15-plus years given the weighted average contract maturity right in that ZIP code. So committed to fully contracting the asset base. And obviously, in the current pricing environment, we're seeing margin expansions and opportunities that provide for a material uplift in long-term AGM per ton.

And of course, that translates directly into annualized adjusted EBITDA and cash flow can be reinvested in the business and stably returned to our shareholders.

Jordan Levy -- Truist Securities -- Analyst

Really encouraging. Thank you. You have a good day.

John Keppler -- Chairman and Chief Executive Officer

Thanks, Jordan.

Operator

Thank you. The next question comes from the line of John Mackay with Goldman Sachs. Please go ahead.

John Mackay -- Goldman Sachs -- Analyst

Hey, good morning, everyone. Thanks for the time. I wanted to start on the cost side. You guys talked a little bit about a few one-offs in the first quarter and some momentum in getting through those.

But eventually, it looks like second quarter was a little higher, at least on a per ton basis. Can you talk about what you're seeing there? Anything you can kind of quantify? And how we should think about costs trending into the rest of the year and into '23?

John Keppler -- Chairman and Chief Executive Officer

Yes, John, good to talk to you again. The -- as we talked when we were last on the phone together, we did exit Q1 with a relatively high inventory balances. So you're seeing that flow through in the quarter. And as Shai mentioned in his remarks, we also ended the quarter with a bit higher inventory given the move from essentially June 30 to about July 2 of a number of ships.

So you don't really get the full benefit of what we're seeing in Q2 cost reductions along the way. What we're pleased about is obviously is a number of those issues that we talked about in Q1 being firmly in the rearview mirror, when you talk about planned absenteeism, the COVID-related impacts that we saw there. Naturally, those are behind us, and you saw an increase in productivity, fixed cost absorption and the overall production profile of our assets. And then, the ones that we, of course, describe as both.

Transitory, as well as more manageable over time and diesel is a pretty good example of that. Certainly, diesel spike in Q1, if you look at the forward curve, that is on a declining curve. So we're encouraged by that. But we also talk about how we manage that.

And certainly, given where we see exposure is really in our logging workforce. And so, as we described in Q1, which is our seasonally softest quarter and one where our loggers are frankly on tracks that are at a further [Inaudible], meaning more road miles transporting fiber to our plants, that means the quantity exposure is higher in the quarter like Q1. Difficult to manage on a Tuesday to Wednesday basis but much more effective to manage month over month. And what we've been able to do is migrate our logging workforce to much closer tracks, so buying forward the rights to harvest on the low-grade timber from particular tracks, bringing those loggers in, meaning that they have not only the benefit of a lower exposure to diesel price on that transitory curve, as well as lower quantity.

You can take another step further in thinking about how much of the fiber processing you actually do on your own site where we have electric chippers, for instance, as opposed to some of our logging partners in the woods, using diesel-powered chipping equipment. And so, you can change that mix and manage and mitigate your exposure to quantities of something like diesel. So we're actually quite pleased in the overall cost quarter over quarter. You won't see the full benefit of that, obviously, until you kind of get to the back half of the year.

And as we get to the back half of the year, what we really see is not only the continued cost reductions that we're engineering but just as importantly, the long-term durable pricing increases that are expanding margins. We clearly gave a guide earlier in the year to what that looks like for 2023 and beyond. The record quarter we're expecting in 2024 -- I'm sorry, in Q4 of this year is really going to be a remarkable uplift. Again, driving out back half of the year, two to one in terms of the EBITDA generation of the business.

That's actually quite consistent with our historical profile. But you're getting a pretty significant uplift this year because of Q4 pricing, realized pricing and volumes delivered into Q4 and certainly into 2023, 2024 and beyond.

John Mackay -- Goldman Sachs -- Analyst

OK. I'm just curious if you might be able to quantify what the impact in COGS from the higher inventory carryover is? Just trying to think about if you can get back to, let's say, 2021 levels on your COGS per ton overall once again to, let's say, fourth quarter like you pointed that?

John Keppler -- Chairman and Chief Executive Officer

I think we focus more on it in terms of -- look, we should be clear, there continues to be uncertainty and volatility in the market, and we would look at this much more on a margin per ton as opposed to an absolute COGS level. Some of that will, of course, be modestly blurred by a ramp of places like Lucedale as we continue to build assets within their overall portfolio. You'll see sort of negative pressure on COGS simply because of lower fixed cost absorption earlier in the production ramp. So it's -- on a steady-state basis, there's no reason to believe that 2021 numbers aren't achievable on a run rate basis.

But you're going to see noise in the system because of bringing plants online. What you will see on an absolute basis is margin per ton continuing to increase year over year.

John Mackay -- Goldman Sachs -- Analyst

OK. That's absolutely fair. If I can squeeze one just related one in. Just in terms of margins moving up on some of the higher pricing realizations, can you guys talk about maybe just how much spot margin you were able to capture this year -- i'm sorry, this quarter just from a tonnage perspective? And how much availability you have that to do going forward?

John Keppler -- Chairman and Chief Executive Officer

Yes, it was actually very little in Q2. As both Shai and Thomas have described in the prepared remarks, it was a few shipments. So very, very modest.

John Mackay -- Goldman Sachs -- Analyst

OK. All right. That's it for me. Thanks for the time.

Appreciate it.

John Keppler -- Chairman and Chief Executive Officer

Thanks, John.

Operator

Thank you. Next question comes from the line of Elvira Scotto with RBC Capital Markets. Please go ahead.

Elvira Scotto -- RBC Capital Markets -- Analyst

Hey. Good morning, everyone. So it looks like you're making some decent progress here on contracts and the MOUs. And you're setting yourself up nicely for the coming years.

But I wanted to touch on the guidance for this year. Shai, can you walk me through the guidance -- you've reaffirmed the $230 million to $270 million guidance for adjusted EBITDA. But when I take into account the comments that you made about 3Q being 50% higher than 2Q and 4Q representing about 40% of the total EBITDA for the year. I don't really get to your guidance.

So can you walk me through that?

Shai Even -- Executive Vice President and Chief Financial Officer

Sure, Elvira. I think that -- thank you for the question. I think that what we can describe again, remind you again, as we said before, we're expecting the second half of the year to generate about two thirds of our adjusted EBITDA for the full year. The percentage are more an indication how the second half of the year will shape kind of like giving an indication that Q3 is a big step compared to Q2, a big step-up.

We mentioned over 50% over Q2. And then Q4, we expect it to be kind of like -- as we expected from the beginning of the year, our strongest quarter of the year as we're getting much more of a volume from the ramp-up of the Lucedale plant, as well as getting benefits of the higher prices in our contracts using the shipping schedule. So we do expect Q4 to be about 40% of our overall adjusted EBITDA for the year. This is all consistent with the ratio of two thirds to a third.

So what we are seeing with all of that, we are still like within the range of $230 million to $270 million. And there's no deviation from that.

Elvira Scotto -- RBC Capital Markets -- Analyst

OK. That's helpful. Can you also provide some details? I know you touched on this a little bit, but around working capital. I know you mentioned that the timing of some shipments affected, I think, inventory, but just some more detail around working capital and when you could expect that to reverse? Because it appears to be decent drag on your cash flow?

Shai Even -- Executive Vice President and Chief Financial Officer

Sure. I think that's a good question. So what we expected in the second quarter is that we have relatively large volume of our sales all happen during the month of June. So it wasn't ratable like maybe you would otherwise will think.

As a result, we ended up with a very large AR balance. So we kind of like increased our working capital in AR for the quarter by about $40 million. Also, as John mentioned, two ships slipped to the beginning of July. That's another about $70 million increase, overall.

Just for the quarter, we experienced between AR and in inventories and increase in marketable of about $47 million. What we've seen for now is that all of our AR we collected. So there is no issue, of course, with AR, and we're expecting kind of like that component of the working capital to return back to normal. So we do expect to generate cash flow from working capital throughout the rest of the year.

Elvira Scotto -- RBC Capital Markets -- Analyst

OK. Great. And then, just the last question -- go ahead.

John Keppler -- Chairman and Chief Executive Officer

Elvira, this is John. Good to talk to you again, by the way. The -- and I'm sorry, we missed the opportunity to connect earlier in the quarter. But -- the -- I want to just come back around because one aspect of your question around guidance that we didn't really cover yet is kind of what drives the high end or the low end of that range.

And what you really see is, because of the production ramp of Lucedale, you've got a significant volume weight to -- on a relative portfolio of assets basis, hitting late in Q4. And so, how many of those vessels ultimately sail in Q4 versus Q1 is going to be a really important driver. And then, what contract mix, given the shipping schedule that we're finalizing right now really hits in Q4 versus Q1, especially given the -- a number of the repricings, as well as the new higher-priced contracts that we've entered into. And so, we're mapping those shipping schedules right now, which is why the range continues to be a little bit wider than we'd otherwise expect right now.

That obviously comes into great relief over the next several weeks and certainly during the quarter. And so, we'll be in a position to provide a much tighter guide as we get to the November earnings call.

Elvira Scotto -- RBC Capital Markets -- Analyst

OK. Great. And then, I was wondering if you could provide -- if you have this -- what -- can you quantify on the EBITDA uplift kind of what comes from volume -- from incremental volumes versus higher pricing?

John Keppler -- Chairman and Chief Executive Officer

Over what period of time, Elvira?

Elvira Scotto -- RBC Capital Markets -- Analyst

Well, yes. I mean, I guess in 2023 and then 2024 because you're talking about those big step-ups in those years?

John Keppler -- Chairman and Chief Executive Officer

Yes. So let's walk back from 2024. Obviously, a pretty significant uplift in 2024, largely volumetrically driven, right, but higher volumes at higher prices, too, right? So you've got the benefit of the Epes facility coming online in 2024. So a very large plant, the largest 1.1 million tons.

And if you do sort of the implied AGM equivalents of $65 million in annualized adjusted EBITDA, you're not going to get the full benefit of that, obviously, in 2024, but that's a pretty healthy EBITDA per ton perspective. So you've got Epes is pretty important there as it comes online at the end of Q3 -- I'm sorry, Q4 2023. And so, then in 2023, you've got some important step-ups in pricing. You've got Lucedale volumes on a full year basis and the benefit of the pricing escalators and the repricing that you see in our contracts.

So you've got margin expansion north of $50 per metric ton in terms of what we've previously guided to relative to our historic AGM in the mid-40s, really important to step up in 2023, volume and price, and again, volume and price in 2024.

Elvira Scotto -- RBC Capital Markets -- Analyst

Great. Thank you very much.

John Keppler -- Chairman and Chief Executive Officer

Absolutely, Elvira. Great to speak with you.

Operator

Thank you. Next question comes from the line of Pavel Molchanov with Raymond James. Please go ahead.

Pavel Molchanov -- Raymond James -- Analyst

Thanks for taking the question. You touched on some of the regulatory nuances earlier. If we zoom in on this European Union Parliamentary Committee proposal to restrict primary biomass from the energy mix. What's the latest on that proposal? And what are the next steps that we should expect?

John Keppler -- Chairman and Chief Executive Officer

Pavel, great to talk with you. The -- I'll actually let Thomas speak to the regulatory environment in a second. But as you know, the most important metric we continue to look at and certainly as the regulatory environment continues to evolve, whether it's domestically or internationally is the behavior of our customers. And in this quarter, we again announced a whole new tranche of contracts.

These are all European contracts with European customers who bear the regulatory risk associated with any potential change in regulation, and they just signed up for higher prices over longer terms and more volumes. And so, we're very convicted by the direction of travel for the regulatory environment. Let me go ahead and turn the answer about the process and how we think this continues to unfold to Thomas, you might know you've met before too.

Thomas Meth -- President

Pavel, good to speak to you again. So I mean, first of all, the -- we are very confident that this regulatory process will come to a positive conclusion where sustainable biomass like we deliver to the European Union will, of course, qualify as we've qualified in the past, that both that you've outlined is an outlier since we have had the ETRA vote where ending September we'll have the plenary vote and clearly all related parties and stakeholders are working on a compromise that will be much more favorable than what we have seen at the Enviva. On top of that, both the Council and the Commission who ultimately have to agree to the final resolution are very pro biomass. And so, the final compromise should be much closer to what the Council and the Commission have proposed rather than some of the noise that we've seen in the past.

And I will tell you, when you think about the broader context of energy in Europe, it's not just only about sustainability anymore as much as that continues to be very important. It's about energy security. And Europe, wherever you go knows that they cannot exclude any alternatives, particularly low-carbon alternatives through their gas crisis because of the Ukrainian crisis. And so, from just an overall pragmatism and reality perspective, biomass will not be included.

And I'm very confident that we're going to find a very positive resolution once this process is over in the first half of 2023.

Pavel Molchanov -- Raymond James -- Analyst

Let me follow up on the other side of the world. You've talked about maybe half of your product sales going to Japan by the middle of this decade. In that -- first of all, is that still the case? And No. 2, will you have interest or appetite in developing production capacity on the West Coast of North America to serve the Japanese market?

John Keppler -- Chairman and Chief Executive Officer

Super question, Pavel. The -- what certainly our existing contract book would tell you is that about 50% of our forward contracted volumes go into Asia and about 50% go into Europe. Given that power pricing is increasingly being set at the marginal price on delivered LNG, we certainly see upward pressure on pricing and a constructive pricing environment for us, both in places like Japan and elsewhere in Asia. And just as importantly, of course, in Europe.

Clearly, the pressure on the energy security question is accelerating contracting, frankly, forward access and even what we had predicted for the European customer set. But that doesn't mean that Asia lags all that far behind. But I think that we should be honest that the pricing environment for a globally delivered commodity where customers in Europe face an environment of LNG plus the implied cost of carbon on a carbon EU ETS basis means that the willingness and ability to pay in the European sector currently exceeds that in where we see in other jurisdictions. And so, there may be a period of time where our contracting accelerates in a greater rate in the European context, while over a longer period of time, the Asian market catches up.

From an export and capacity basis, we continue to rack and stack opportunities in lots of different jurisdictions. They generally don't pencil out as favorably as the Southeast U.S. That doesn't mean that that's never do it somewhere else, and we've talked a little bit about the opportunities in California, although that more likely will be production in California, staying in California for things like sustainable aviation fuel or more difficult-to-abate sectors.

Pavel Molchanov -- Raymond James -- Analyst

Thanks very much, guys.

John Keppler -- Chairman and Chief Executive Officer

Pavel, great to talk to you.

Operator

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to John Keppler, chairman and CEO, for any closing remarks.

John Keppler -- Chairman and Chief Executive Officer

Well, again, thank you, everyone, for joining us on our Q2 call. Obviously, we believe we're set up for a very important back half of the year and setting the stage for an even stronger 2023 and 2024. We'll look forward to getting back together in just a couple of months, if not before. And again, thanks for the time today.

Talk soon.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Kate Walsh -- Vice President, Investor Relations

John Keppler -- Chairman and Chief Executive Officer

Shai Even -- Executive Vice President and Chief Financial Officer

Thomas Meth -- President

Jordan Levy -- Truist Securities -- Analyst

John Mackay -- Goldman Sachs -- Analyst

Elvira Scotto -- RBC Capital Markets -- Analyst

Pavel Molchanov -- Raymond James -- Analyst

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