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News Release - November 12, 2019Pinnacle Renewable Energy Reports Fiscal 2019 Third Quarter Results

/NOT FOR DISTRIBUTION IN THE UNITED STATES/

VANCOUVER, Nov. 12, 2019 /CNW/ - Pinnacle Renewable Energy ("Pinnacle" or the "Company") (TSX: PL) today announced its financial results for the quarter ended September 27, 2019 ("Q3 2019").

Q3 2019 Highlights

Subsequent to Q3 2019 Highlights

"The third quarter of 2019 was a challenging period as a number of our B.C. fibre suppliers curtailed operations, resulting in a transition to an increased use of harvest residuals in our production process, driving higher costs," said Rob McCurdy, CEO of Pinnacle. "Our team continues to actively focus on reducing costs and improving the operating efficiencies of our B.C. facilities, as well as transitioning of our fibre procurement strategy by leveraging more harvest residuals, developing enhanced processing strategies, and working with First Nations and the B.C. government to diversify our fibre suppliers. While we are laser-focused on fibre management and processing in B.C. we are also encouraged by the ongoing development and diversification of the business with the re-start of the Entwistle facility, recently announced contracts in Japan, and the construction of the High Level facility in Alberta."

Q3 2019 Financial Results
Revenue for Q3 2019 totaled $92.6 million, an increase of 5.6% compared to $87.6 million for the 13-week period ended September 28, 2018 ("Q3 2018"). The increase was primarily attributable to higher selling price per MT and a higher proportion of cost, insurance and freight contracts. Higher volumes of pellets from Pinnacle's Smithers and Aliceville facilities in Q3 2019 compared to Q3 2018 when there were no sales from these facilities was offset by lower production volumes at the B.C. facilities due to the impacts from the ongoing sawmill curtailments.

Adjusted Gross Margin¹ was $18.7 million, or 20.2% of revenue in Q3 2019, compared to $17.9 million, or 20.5% of revenue in Q3 2018. The decrease in Adjusted Gross Margin¹ was primarily attributable to higher production and distribution costs which more than offset the higher revenue. The higher production costs and fixed overhead costs resulting from the Entwistle Incident, were partially offset by business interruption insurance related to the Entwistle Facility received during the quarter. Adjusted Gross Margin¹ for Q3 2019 also reflects the Company's adoption of IFRS 16². Excluding the impact of the implementation of IFRS 16² and the Entwistle Incident, Q3 2019 Adjusted Gross Margin¹ was $14.3 million, or 15.5% of revenue.

The Company reported a net loss of $0.7 million in Q3 2019, compared to a net profit $1.5 million in Q3 2018. The change in net profit reflects higher distribution costs, higher amortization costs reflecting the Company's new production facilities, and higher production costs due to higher fibre costs, cash conversion costs and costs incurred for third party wood pellet purchases,  partially offset by reduced selling, general and administrative ("SG&A") expenses. Excluding the impact of the implementation of IFRS 162 and the Entwistle Incident, net loss in Q3 2019 was $1.6 million. Comprehensive income for Q3 2019 was $28 thousand.

Adjusted EBITDA¹ totaled $14.3 million in Q3 2019, $0.2 million lower than the $14.5 million in Q3 2018. Increased revenue was more than offset by higher cash conversion costs (due primarily to fibre mix constraints which increased repair and maintenance costs), distribution costs and other expenses. Excluding the impact of $1.8 million in costs and $4.0 million of business interruption insurance associated with the Entwistle Incident, as well as an increase of $1.8 million related to the adoption of IFRS 16², Q3 2019 Adjusted EBITDA¹ was $10.3 million.

As at the end of Q3 2019, the Company had available liquidity of $58.2 million from cash balances and debt facilities (excluding the delayed draw facility), compared to $49.1 million at the end of 2018, which Pinnacle expects to be sufficient throughout Fiscal 2020. At the end of Q3 2019 the ratio of net debt to last twelve month Adjusted EBITDA¹ was 5.5 times. This ratio was elevated due to the investment in the Aliceville Facility in Q4 2018, significant new capacity at the Entwistle and Smithers Facilities, in expansion projects at Williams Lake and Meadowbank, and High Level  have not yet generated their run-rate Adjusted EBITDA¹. As these facilities reach their run-rate capacity, this ratio is expected to decline.

New Off-take Agreements
During the quarter, Pinnacle entered into a long-term, take-or-pay contract with Mitsubishi for up to 120,000 MTPA commencing in 2021. Subsequent to the end of the third quarter, Pinnacle entered into a long-term, take-or-pay contract with Mitsui for 100,000 MTPA commencing in 2023.

These contracts are the eighth and ninth contracts signed with customers in Japan since the beginning of Fiscal 2018 demonstrating the Company's successful advancement of the strategy for sales growth into Japan. New contracts improve The Company's customer diversification across Japan, the U.K., South Korea, and Europe.

New Facility in High Level, AB
Early in Q3 2019, Pinnacle entered into a limited partnership agreement with Tolko Industries Ltd. ("Tolko") to build a new industrial wood pellet production facility in High Level, Alberta. The Facility further diversifies the Company's fibre supply using high-quality wood fibre sourced primarily from Tolko's existing sawmill in High Level. The Facility is expected to have a run-rate production capacity of 170,000 to 200,000 metric tons per annum. Annual production volumes from the Facility will be sold through Pinnacle's contracted backlog of long-term, take-or-pay off-take contracts. Under the terms of the Partnership, Pinnacle and Tolko will each own a 50 percent interest in the Facility.

Under the terms of the Partnership, Pinnacle will operate the Facility and manage all aspects of customer relations, marketing, sales, and logistics. Tolko will supply both heat energy and fibre to the Facility under long-term supply agreements. The Facility, which is being constructed on land owned by Tolko, began construction in August 2019, and will continue through November 2019 at which time winter weather conditions reduce the efficiency of construction activities. Initial wood pellet production at the Facility is expected to commence in the fourth quarter of 2020. The capital cost of the Facility is expected to be approximately $54 million, with 50 percent funded by Pinnacle and 50 percent by Tolko. Pinnacle expects the capital cost to be in line with its capital cost to run-rate EBITDA ratio target range. At the end of Q3 2019, $7.8 million had been spent on this project, $6.6 million of which was spent during Q3 2019. Pinnacle is funding its portion of the capital costs from draws on its recently expanded credit facilities. 

Production Facility Upgrades
The fibre drying and air filtration equipment upgrades at the Williams Lake facility are progressing on schedule, and the planning and design work is underway for upgrades at the Meadowbank facility. The upgrades will allow the two facilities, both of which are located within the Cariboo region of B.C., to process a broader array of available fibre sources available in the region and achieve a series of safety and environmental advancements. This strategic investment will enhance the operating flexibility of the facilities and position Pinnacle to adapt to cyclical changes in wood fibre supply within the B.C. interior. Further, the equipment, technology and infrastructure improvements will result in improved facility operating efficiencies, lower emissions, local employment opportunities and greater overall facility safety.

Upon completion of the upgrades, the Williams Lake and Meadowbank facilities are expected to have an increase of 80,000 MTPA in combined overall production capacity. Commissioning for the upgrades at Williams Lake and Meadowbank are expected to commence in Q1 2020 and Q3 2020, respectively.

At the Aliceville facility, the first phase of the planned capital improvement plan was completed in Q3 2019. The capital investment focused on improvements to fibre flow, processing, and operating efficiency, and resulted in improvements in operating performance starting in September. The second phase of the planned capital improvement plan is expected to commence in Q2 2020 and will focus on further improvements to fibre flow and processing in order to drive cost effective increases in production capacity. Ongoing work with fibre suppliers to optimize fibre mix and production levels have steadily increased through Q3 2019.

Entwistle Restart

We restarted the Entwistle dryer in early November as previously committed.  We have finished the rebuild, restarted the furnace and dryer, and are in the process of commissioning the new equipment. On March 29, 2019 Pinnacle resumed partial operations at the Entwistle Facility at reduced levels with the production of pellets from dry fibre. The Entwistle Facility continued partial operations during Q3 2019 at reduced levels with the production of pellets from dry fibre.

Restoration of the facility is expected at a total estimated capital cost of approximately $15.0 million. Other costs are estimated to be approximately $10.0 million, of which $7.6 million has been incurred year-to-date. Pinnacle is actively working with customers and partners to mitigate the impacts of the anticipated 2019 production shortfall and continues to work with the Company's insurance providers to determine the insurance recoveries available for the Entwistle Incident. Pinnacle expects substantially all costs incurred to be recoverable through insurance, subject to deductibles.

In Q3 2019 there were no additional asset impairment charges recorded, $9.4 million was recognized in Q1 2019 for assets impaired in the incident which has reduced property, plant and equipment and lowered net income for the period. The net income impact has been partially offset by property insurance proceeds recorded in net income on the income statement of $8.0 million as at the end of Q3 2019 (net of deductibles). The property insurance amount recoverable of $5.0 million recognised in the second quarter was received during the third quarter, positively impacting cash flow. At the end of Q3 2019, a total of $8.5 million for business interruption insurance has been recognised in net income on the income statement, $4.0 million of which was recognised in Q3 2019, and the $4.5 million previously recognised in Q2 2019 was received in Q3 2019, positively impacting cash flow.

Outlook
We expect production and revenue growth pressure to continue through the end of 2019 and into 2020, as the facilities in B.C. continue to process a wider mix of harvest residuals due to sawmill curtailments in the province. As a result, as previously communicated Adjusted EBITDA¹ for Fiscal 2019 is expected to be below the guidance provided for the year.

We remain focused on improving our fibre, fibre processing, haulage, and cash conversion costs. Pinnacle's partner sawmills in B.C. are cooperating to ensure the B.C. facilities have additional visibility and replacement fibre sources where possible. The fibre team is working to source cleaner, lower cost consistent sources of replacement fibre to fill identified gaps and has ensured that delivered fibre will exceed requirements for the current operating plan for the facilities in Q4 2019 and Q1 2020.

There is a risk that there will be further curtailment announcements, however, the Company is now better prepared to manage impacts of the curtailments than in previous quarters. Additionally, with the restart of the Entwistle dryer and production from Aliceville, we will have more production occurring outside of the impacted B.C. fibre basket. As we complete the Cariboo capital project in Williams Lake and Meadowbank in 2020, we will be better able to produce with the anticipated fibre mix.

Dividend
The Board of Directors today approved the payment of the Company's Q3 2019 dividend of $0.15 per Common Share. Payment will be made on December 6, 2019 to shareholders of record as at November 22, 2019.

Selected Consolidated Financial Information
The following tables set forth selected financial information for Q3 2019 compared to the prior year period. Such information has been derived from Pinnacle's unaudited interim consolidated financial statements and accompanying notes.



Q3 2019


Q3 2018


YTD 2019


YTD 2018

(In thousands except per share amounts)


13 weeks


13 weeks


39 weeks


39 weeks










Consolidated Statements of Profit (Loss) and

Comprehensive Income (Loss) Data









Revenue

$

92,552

$

87,606

$

286,343

$

243,712

Costs and expenses:









Production


59,355


57,222


195,811


159,635

Distribution


14,457


12,360


40,228


33,528

Selling, general and administration


4,808


5,374


13,748


18,856

Amortization


9,943


6,719


29,327


17,458

Profit before finance costs and other
Income (expenses)


3,989


5,931


7,229


14,235

Finance cost


(4,813)


(4,360)


(18,975)


(4,783)

Other income (expense)


(71)


399


5,726


(17,264)

Net income (loss) before income taxes 


(895)


1,970


(6,020)


(7,812)

Income tax (expense) recovery









Deferred income taxes


169


(454)


1,410


3,058

Net profit (loss)

$

(726)

$

1,516

$

(4,610)

$

(4,754)

Impact of:









IFRS 16

$

(626)


N/A

$

(1,397)


N/A

Entwistle Incident

$

1,549


N/A

$

(558)


N/A

Net profit (loss) (excluding above
impact)

$

(1,649)

$

1,516

$

(2,655)

$

(4,754)

 

Consolidated Statements of Cash Flows









Cash provided by (used in)









Operating activities before net change in
non-cash working capital

$

15,799

$

14,211


$           53,421

$

37,692

Net change in non‑cash operating working
capital

$

(7,050)

$

(11,923)

$

(29,342)

$

1,519

Financing activities

$

812

$

(5,268)

$

(5,654)

$

(1,180)

Investing activities

$

(11,043)

$

(12,093)

$

(28,193)

$

(49,989)

 


Q3 2019

Q3 2018

YTD 2019

YTD 2018

(In thousands except per MT amounts)

13 weeks

13 weeks

39 weeks

39 weeks







Other Financial Data






Adjusted EBITDA(1)

$

14,256

$

14,454

$

38,699

$

41,272

Adjusted EBITDA per MT(1)

$

33.70

$

35.60

$

29.70

$

36.88

Adjusted Gross Margin per MT(1)

$

44.24

$

44.15

$

39.03

$

45.56

Adjusted Gross Margin Percentage(1)


20.2%

20.5%

17.8%

20.9%

Maintenance capital expenditures

$

2,018

$

3,132

$

7,278

$

5,449

Growth capital expenditures

$

10,478

$

9,020

$

21,277

$

44,714

Operating Data






MT of industrial wood pellets sold


423

421

1,303

1,134





September 27,

December 28,

(In thousands)


2019

2018





Selected Consolidated Statements of Financial Position Data




Cash and cash equivalents


$          8,335

$        18,028

Property, plant and equipment


$      376,818

$      330,899

Total assets


$      602,363

$      627,294

Total current liabilities


$        77,963

$        76,644

Total non-current liabilities


$      388,151

$      398,281

Total equity


$      214,212

$      229,013

 

Financial Statements
Pinnacle's unaudited consolidated financial statements and Management's Discussion & Analysis for Q3 2019 are available on the Company's website at pinnaclepellet.com or on SEDAR at www.sedar.com.

Conference Call
Robert McCurdy, CEO and Andrea Johnston, CFO, will host a conference call for investors and analysts on Tuesday, November 13, 2019 at 10:00 am (ET) / 7:00 am (PT). The dial-in numbers for the conference call are (416) 764-8609 or 1-888-390-0605. A live webcast of the call will be accessible via Pinnacle's website at: http://pinnaclepellet.com/investors/presentations-events

To access a replay of the conference call dial (416) 764-8677 or 1-888-390-0541, passcode: 830460#. The replay will be available until November 20, 2019.  The webcast will be archived following conclusion of the call.

About Pinnacle
Pinnacle is a rapidly growing industrial wood pellet manufacturer and distributor and the third largest producer in the world. The Company produces sustainable fuel for renewable electricity generation in the form of industrial wood pellets. This fuel is used by large-scale thermal power generators as a greener alternative to produce reliable baseload renewable power. Pinnacle is a trusted supplier to its customers, who require reliable, high-quality fuel supply to maximize utilization of their facilities. Pinnacle takes pride in its industry leading safety practices. The Company operates eight industrial wood pellet production facilities in western Canada and one in Alabama, and owns a port terminal in Prince Rupert, B.C.  Pinnacle has entered into long-term take-or-pay contracts with utilities in the U.K., Europe and Asia that represent an average of 108% of its production capacity through 2026.

(1) Non-IFRS Financial Measures
This news release makes reference to certain non-IFRS measures. These measures are not recognized measures under IFRS, and do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of our results of operations from management's perspective. Accordingly, these measures should not be considered in isolation nor as a substitute for analysis of our financial information reported under IFRS. We use non-IFRS measures including "EBITDA", "Adjusted EBITDA", "Adjusted EBITDA per Metric Ton", "Adjusted Gross Margin", "Adjusted Gross Margin per Metric Ton", "Adjusted Gross Margin Percentage" and "Free Cash Flow". These non-IFRS measures are used to provide investors with supplemental measures of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS measures. We also believe that securities analysts, investors and other interested parties frequently use non-IFRS measures in the evaluation of issuers. Our management also uses non-IFRS measures in order to facilitate operating performance comparisons from period to period, to prepare annual operating budgets and forecasts and to determine components of management compensation. As required by Canadian securities laws, we reconcile these non-IFRS measures to the most comparable IFRS measures in our Management Discussion & Analysis for Q3 2019.

(2) IFRS 16 Implementation
Pinnacle adopted IFRS 16 Leases at the beginning of Fiscal 2019. For a description of IFRS 16 please refer to the Company's Management Discussion & Analysis for Q3 2019.  As a result of initially applying IFRS 16, in relation to the leases that were previously classified as operating leases, Pinnacle recognized $36.8 million of right-of-use assets and $36.8 million of lease liabilities as at December 29, 2018. Further, in relation to those leases under IFRS 16, Pinnacle has recognized depreciation and interest costs, instead of operating lease expense. During Q3 YTD 2019, the Company recognized $2.0 million of depreciation charges and $0.6 million of interest costs from these leases.

As a result of applying IFRS 16, Adjusted Gross Margin and Adjusted EBITDA for Q3 2019 have increased by $1.8 million related to lease payment expenses that were previously classified as operating leases under IAS 17. Also in relation to applying IFRS 16, Free Cash Flow for Q3 2019 has increased by $1.2 million related to lease payment expenses that were previously classified as operating leases under IAS 17, partially offset by a decrease of $0.6 million related to interest costs (increase in net interest and finance costs includes interest payment expense on capital leases under IFRS 16 of $0.6 million).

Forward-Looking Information
This news release may contain "forward-looking information" within the meaning of applicable securities laws in Canada. Forward-looking information may relate to Pinnacle's future financial outlook and anticipated events or results and may include information regarding its financial position, business strategy, growth strategies, budgets, operations, financial results, taxes, dividend policy, plans and objectives. Particularly, information regarding the Company's expectations of future results, performance, achievements, prospects or opportunities or the markets in which it operates is forward-looking information. In some cases, forward-looking information can be identified by the use of forward-looking terminology such as "plans", "targets", "expects" or "does not expect", "is expected", "an opportunity exists", "budget", "scheduled", "estimates", "outlook", "forecasts", "projection", "prospects", "strategy", "intends", "anticipates", "does not anticipate", "believes", or variations of such words and phrases or state that certain actions, events or results "may", "could", "would", "might", "will", "will be taken", "occur" or "be achieved". In addition, any statements that refer to expectations, intentions, projections or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not historical facts but instead represent management's expectations, estimates and projections regarding future events or circumstances. If any of the opinions, estimates or assumptions underlying the forward-looking information prove incorrect, actual results or future events might vary materially from those expressed in the forward-looking information. The Company has no obligation or undertaking to update or revise any forward-looking information whether as a result of new information, future events or otherwise, except as required under applicable securities laws in Canada. Actual results and the timing of events may differ materially from those anticipated in the forward-looking information as a result of various factors, including those described in "Risk Factors" which are described in the Company's most recent Annual Information Form ("AIF") filed on SEDAR (www.sedar.com).

We caution that the list of risk factors and uncertainties is not exhaustive and other factors could also adversely affect our results. Readers are urged to consider the risks, uncertainties and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such information. See "Forward-looking Information" and "Risk Factors" in the Company's most recent AIF and its Management's Discussion & Analysis for Q3 2019 available on SEDAR for a discussion of the uncertainties, risks and assumptions associated with these statements.

SOURCE Pinnacle Renewable Energy Inc.

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