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News Release - May 11, 2020Pinnacle Renewable Energy Reports Fiscal 2020 First Quarter Results

/NOT FOR DISTRIBUTION IN THE UNITED STATES/

VANCOUVER, May 11, 2020 /CNW/ - Pinnacle Renewable Energy ("Pinnacle" or the "Company") (TSX: PL) today announced its financial results for the 13-week period ended March 27, 2020 ("Q1 2020").

Q1 2020 Financial and Operational Highlights

Q1 2020 Challenges

Dividend Policy and Liquidity

In light of the uncertainty in the global economic climate, a review of the Company's dividend policy was conducted by the Board. The Board determined that in order to ensure the Company is well-positioned to withstand the ongoing economic impacts from the COVID-19 health threat, and preserve liquidity for growth capital, the dividend will be revised to an annual level of $0.15 per common share during this period of uncertainty related to COVID-19, beginning with the dividend payable for the first quarter of 2020.

Pinnacle currently has sufficient liquidity and is within its financial covenants with its lending syndicate, and this revision will help to ensure the business is prepared in the event of an extended global economic crisis. This cautious approach and re-prioritization of capital will contribute to maintaining a healthy balance sheet and provide greater flexibility for the Company to continue to pursue its strategy.

The Board of Directors today approved the payment of the Company's Q1 2020 dividend of $0.0375 per Common Share. Payment will be made on June 5, 2020 to shareholders of record as at May 22, 2020.

"With little foresight on how and when the COVID-19 pandemic will come to an end, Management and the Board made the difficult but prudent decision to reduce the dividend during this period." said Rob McCurdy, CEO of Pinnacle. "We have not seen a change in demand for industrial wood pellets and have strength with our long-term take-or-pay contracts supporting the Company, however the lumber industry, particularly in B.C., is under pressure as the economy continues under stress, and this in turn will impact our fibre supply and increase our costs. Our team continues to work diligently under the safety standards guided by the health authorities and have increased inventories of harvest residuals in preparation."

Q1 2020 Financial Results

Revenue for Q1 2020 totaled $109.7 million, an increase of 22.4% compared to $89.6 million for Q1 2019. The increase is primarily attributable to higher sales volumes. Cost, insurance, and freight ("CIF") sales in Q1 2020 were 1.2% lower than Q1 2019 and accounted for 48% of total sales in Q1 2020 which also contributed to a shift of revenue in Q1 2020 compared to Q1 2019. The Company also experienced shipping delays due to the CN Rail strike in Q4 2019 that resulted in a shift of revenue into Q1 2020.

Production costs were $86.1 million for Q1 2020, an increase of $19.0 million, or 28.3% compared to $67.1 million for Q1 2019. The increase in production costs can be attributed to an increase in sales volume, higher fibre costs and higher rail costs. Production costs were also affected by the high cost of Q4 2019 inventory sold in Q1 2020. This inventory included high fibre costs consumed in Q4 as well as the costs associated with the CN Rail disruptions in Q4 2019. The higher costs were partially offset by lower cash conversion costs. During Q1 2020, we sold third-party pellets for a net loss of $0.4 million. Additional production costs were also incurred to manage the impact of the disruption from the CN Rail blockades.

Adjusted Gross Margin¹ was $9.0 million, or 8.2% of revenue in Q1 2020, compared to $10.4 million, or 11.6% of revenue in Q1 2019. The decrease in Adjusted Gross Margin¹ Percentage was primarily due to an increase in operating loss, partially offset by increases in selling, general and administrative ("SG&A") expenses and amortization expenses in Q1 2020. Production costs in Q1 2020 include $0.03 million of costs associated with fixed overhead and incident response costs for the Entwistle Incident. These costs are offset by $1.0 million of business interruption insurance receivable recorded in Q1 2020. Excluding the impact of the Entwistle Incident, Q1 2020 Adjusted Gross Margin¹ was $8.0 million, or 7.3% of revenue.

The Company reported a net loss of $4.1 million in Q1 2020, compared to a net loss of $7.0 million in Q1 2019. The change in net loss reflects higher SG&A expenses, production and distribution costs and amortization costs reflecting the Company's new production facilities, partially offset by reduced finance costs. Excluding the impact of the Entwistle Incident, net loss in Q1 2020 was $5.9 million.

Adjusted EBITDA¹ totaled $4.0 million in Q1 2020, compared to $7.1 million in Q1 2019. The decrease is attributable to higher production costs due to increased sales volume, the sale of external finished pellet inventory and costs incurred to manage the impact of the CN Rail disruptions and higher port charges due to blockades. This was partially offset by the impact of business interruption amounts recoverable.

Production Facility Construction and Upgrades

In Q4 2019, Pinnacle announced a plan to begin construction of a new industrial wood pellet production facility in the U.S southeast near the Aliceville Facility. The new facility (the "Demopolis Facility") will be located adjacent to an existing large sawmill in Demopolis, Alabama. The Demopolis Facility is expected to have annual production volume of 360,000 MTPA that will be sold through Pinnacle's contracted backlog of long-term, take-or-pay off-take contracts. As mentioned above, with added health and safety precautions in place, construction teams broke ground at this facility in Q1 2020 and construction has progressed as planned and within budget during the quarter. With the addition of the Demopolis facility, Pinnacle will have over 44% of its run-rate production capacity outside of the B.C. fibre basket. Commissioning the Demopolis Facility with initial industrial wood pellet production is expected in the second quarter of 2021.

Construction at the High Level Facility resumed with added health and safety precautions, as planned, in March 2020 along with the arrival of warmer weather conditions. The High Level Facility is expected to be completed as planned in Q4 2020. Review of budget and schedule and advancement of scope for the CN rail infrastructure has resulted in additional capital required of $2.0 million, bringing the total to $60.5 million before the project's share of capital required for rail infrastructure, with Pinnacle's 50% share being $30.25 million plus 50% of the project's share of capital for rail infrastructure. The budget overruns are the result of concerns with the design and fabrication of structural elements of the facility. Tolko has indicated that additional fibre will be available for upcoming years due to forest fire log processing, providing a strong supply of fibre.  We are confident that this will enable the High Level Facility to produce 200,000 MTPA.

The installation of a chipper and additional pelleter at the Smithers facility for a total capital cost of approximately $6.0 million (Pinnacle's portion: $4.2 million funded from existing credit facilities) is expected to decrease costs and increase production run-rate output by approximately 15,000 MTPA. A substantial portion of this project was expected to begin in Q1 2020, but for the reasons stated above relating to COVID-19, Management has decided to extend the project schedule by approximately six months.

Operations at the Williams Lake facility continue with the current dryer in place and the dryer upgrade project has been temporarily suspended as equipment vendors were not able to travel onsite for commissioning purposes due to travel restrictions resulting from the COVID-19 pandemic. As this project is near completion, Management is investigating various options to engage remote support in order to safely commission the remainder of the project in Q2 2020.

Upgrades at the Meadowbank Facility have been put on an extended schedule in order to preserve capital due to COVID-19 as previously stated. The expansion of the Meadowbank Facility is expected to be completed in 2021.

Outlook

We expect growth in revenue and profitability over the next several years as a result of contracted price increases in most of our off-take agreements. In addition, as the potential demand for industrial wood pellets continues to grow globally, we are well positioned to meet this demand growth through a combination of expansion projects at existing production facilities and new greenfield and brownfield growth projects. Moreover, we will continue to evaluate potential acquisitions and joint ventures to grow our production platform and continue to capture opportunities in the growing Asian marketplace as a result of our longstanding relationships with customers in the region.

The Entwistle Facility achieved increasing production levels during Q1 2020, exceeding the commissioning curve for the facility. The facility is expected to continue to improve and add production volume throughout the year making a positive contribution to Adjusted EBITDA1 in Fiscal 2020. As the Company's insurer monitors production ramp post restart, further business interruption insurance in Fiscal 2020 will be sought. Final insurance recoveries of capital costs incurred for the rebuild are expected in Fiscal 2020 as well.

Production at the Aliceville facility has returned as water levels have receded and silo storage is back to normal as regular barge transportation has resumed. As both the Aliceville and Smithers facilities are both operating at full production run-rate, incremental production volume and Adjusted EBITDA1 contribution is expected for 2020.

CN Rail blockades and port delays experienced in February have not impacted service since that time. Progress was realized in March with solid production volume and cost performance as the facilities were able to operate continuously without the earlier impacts of operational disruptions.

Sawmills and key fibre suppliers have started to curtail output as a result of the impacts from COVID-19 on their businesses.  As a result, the Company will be dependent on harvest residuals in 2020 more than in the last quarter. Fibre breakdown capital and operating requirements to meet production needs will continue to be addressed. As the proportion of wet, coarse fibre to dry fibre increases, drying capacity constraints at some mills are expected, resulting in production volume reductions in some of our B.C. mills impacting Adjusted Gross Margin1. In response to the announced and anticipated sawmill curtailments, inventory of fibre at B.C. mills has increased by 103% compared to the end of Q1 2019. As Q2 2020 continues we see B.C. sawmill residual supplies stabilizing as lumber demand is relatively constant, government incentives are enacted, and the industry looks toward reduction in stumpage rates in Q3 2020.   Although there are some sawmill curtailments in Alabama, Pinnacle does not expect production volume or costs to be significantly impacted. The Company continues to have strong availability of wood fibre in Alberta.

Over the last two quarters the incremental procurement cost of harvest residuals has been reduced.  When the large curtailments were announced in Q3 2019, fibre was purchased at a higher cost to ensure consistency of supply and build inventories. In Q4 2019, and even more so in Q1 2020, a more selective approach to fibre quality and cost was utilized given the current strong inventory levels.  The benefit of the cost reduction activities is not yet reflected in Q1 2020 results as older, higher cost fibre and shipping pellets made in prior months are being consumed. 

Selected Consolidated Financial Information

The following tables set forth selected financial information for Q1 2020 compared to the prior year period. Such information has been derived from Pinnacle's unaudited interim consolidated financial statements and accompanying notes.



Q1 2020

Q1 2019

(In thousands $ except per share amounts)


13 weeks

13 weeks


Consolidated Statements of Profit (Loss)


Revenue


109,675

89,627


Costs and expenses:






Production


86,129

67,121



Distribution


14,561

12,766



Selling, general and administration


4,657

3,793



Amortization


10,794

9,602


Loss before finance income (cost) and other income (expense)


(6,466)

(3,655)



Finance income (cost)


(1,500)

(6,773)



Other income (expense)


2,395

880


Net loss before income taxes 


(5,571)

(9,548)


Income tax (expense) recovery:




Current


-

-



Deferred income taxes


1,437

2,542


Net loss


(4,134)

(7,006)


Impact of:





Entwistle Incident


1,782

(1,566)


Net loss (excluding above impact)


(5,916)

(5,440)




Basic and diluted


(0.12)

(0.20)

 



Q1 2020

Q1 2019

(In thousands $ except per MT amounts)


13 weeks

13 weeks





Other Financial Data





Adjusted EBITDA(1)


4,044

7,060


Adjusted EBITDA per MT(1)


7.93

17.56


Adjusted Gross Margin per MT(1)


17.64

25.79


Adjusted Gross Margin Percentage(1)


8.2%

11.6%


Maintenance capital expenditures


(538)

(430)


Growth capital expenditures


-

-

Operating Data





MT ('000) of industrial wood pellets sold


510

402

 



March 27,

March 29,

(In thousands $)


2020

2019

Consolidated Statements of Cash Flows




Cash provided by (used in)




Cash flow from operations before net change in
non-cash operating working capital


9,873

16,620

Net change in non‑cash operating working capital


1,926

(6,366)

Financing activities


15,372

(13,604)

Investing activities


(35,473)

(6,261)

 



March 27,

December 27,

(In thousands $)


2020

2019





Selected Consolidated Statements of Financial Position Data




Cash & cash equivalents


3,048

11,267

Property, plant and equipment


420,185

399,181

Total assets


640,885

629,911

Total current liabilities


76,402

96,567

Total non-current liabilities


433,678

421,194

Total equity


207,207

208,717

Financial Statements

Pinnacle's unaudited interim consolidated financial statements and Management's Discussion & Analysis for Q1 2020 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, May 12, 2020 at 11:00 am (ET) / 8:00 am (PT). The dial-in numbers for the conference call are 416-764-8688 or 1-888-390-0546. 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: 298156#. The replay will be available until May 19, 2020. The webcast will be archived following conclusion of the call.

About Pinnacle

Pinnacle is a 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, with two additional facilities under construction in Alberta and Alabama. The Company also 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 99% 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 Q1 2020.

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 Q1 2020 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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