VANCOUVER, CNW/ – Pinnacle Renewable Energy has announced its financial results for the 13-week and 52-week periods ended December 27, 2019.
Fiscal 2019 Financial Highlights
- Revenue of $377.8 million in Fiscal 2019, compared to $347.4 million of revenue for the 52-week period ended December 28, 2108 (“Fiscal 2018”);
- Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”)1for Fiscal 2019 totalled $47.2 million, compared to $55.1 million in Fiscal 2018;
- Excluding the impact of the implementation of IFRS 162and the incident at the Company’s Entwistle facility, Fiscal 2019 Adjusted EBITDA1 was $35.5 million; and
- Sold 1.72 metric tonnes (“MT”) of industrial wood pellets in 2019 compared to 1.61 MT sold in 2018.
Q4 2019 Highlights
- Revenue of $91.5 million in Q4 2019, compared to $103.7 million of revenue in the 13-week period ended December 28, 2018 (“Q4 2018”);
- Adjusted EBITDA1totaled $11.3 million in Q4 2019, compared to $13.8 million in Q4 2018;
- Excluding the impact of the implementation of IFRS 162and the incident at the Company’s Entwistle facility, Q4 2019 Adjusted EBITDA1 was $6.1 million;
- Entered into a new long-term, take-or-pay off-take contract with Mitsui & Co. Ltd. (“Mitsui”), for 100,000 metric tonnes per annum (“MTPA”) of industrial wood pellets provided to Mitsui beginning in 2023, to be used by a biomass power generation plant in Japan;
- Entered an agreement with The Westervelt Company (“TWC”) and Two Rivers Lumber Company, LLC (“TRL”) to build a new industrial wood pellet production facility in Demopolis, Alabama with production capacity of 360,000 MTPA;
- The dryer at the Entwistle Facility successfully restarted early in November as expected, and the destoner operation commenced successfully on time and within budget; and
- Employees of CN Rail (“CN”) went on strike on November 19, 2019 for a period of eight days.
- Resulted in unforeseen stalled shipments in Q4 2019, as ships were rescheduled to avoid costs during this period of high rail uncertainty.
- Subsequent delays that occurred while CN’s operations began to recommission its network resulted in curtailed production at our B.C. facilities and a loss of 20kMT of lost production, due to maximized storage capacity. Despite this, we are able to meet customer commitments.
- Additional production, rail, shipping demurrage and management costs were incurred to manage the impacts of the operations disruption from the strike. Approximately $1.6 million of Adjusted EBITDA was missed in the quarter as a result of the CN strike and the subsequent rail delays.
“While Fiscal 2019 offered up some challenges for Pinnacle, mainly due to the incident at Entwistle and fibre supply issues as a result of B.C. sawmill curtailments, our team worked diligently to remedy both situations and we look forward to realizing on the opportunities 2020 presents,” said Rob McCurdy, CEO of Pinnacle. “We continue to strengthen and diversify the Company through growth and expansion of our existing facilities and through the construction of new facilities, and I am confident that the Pinnacle team will continue to successfully execute on the Pinnacle strategy this year and well into the future.”
Q4 2019 Financial Results
Revenue for Q4 2019 totalled $91.5 million, a decrease of 11.8% compared to $103.7 million for Q4 2018. The decrease was primarily attributable to disruption to reduced production in the B.C. facilities with a greater concentration of harvest residuals and the Burns Lake maintenance capital shut as well as shipping delays due to the CN rail strike in Q4 2019.
Adjusted Gross Margin1 was $16.4 million, or 17.9% of revenue in Q4 2019, compared to $16.7 million, or 16.1% of revenue in Q4 2018. The increase in Adjusted Gross Margin1 Percentage was primarily attributable to $4.5 million of business interruption insurance receivable net of $1.1 million of costs associated with fixed overhead and incident response costs for the Entwistle Incident booked as a reduction of production costs and high start-up costs incurred at Aliceville and repair and maintenance costs incurred at our Entwistle Facility in Q4 2018. B.C. same facility production levels in Q4 2019 were, however, lower compared to the prior year, mainly due to the CN rail strike, scheduled capital shut down at our Burns Lake Facility, as well a greater concentration of harvest residuals used in production in order to replace reduced sawmill residuals output. Adjusted Gross Margin1 for Q4 2019 also reflects the Company’s adoption of IFRS 162. Excluding the impact of the implementation of IFRS 162 and the Entwistle Incident, Q4 2019 Adjusted Gross Margin1 was $11.0 million, or 12.1% of revenue.
The Company reported a net loss of $3.2 million in Q4 2019, compared to a net profit of $7.4 million in Q4 2018. The change in net profit reflects higher selling, general and administrative (“SG&A”) expenses and amortization costs reflecting the Company’s new production facilities, as well as increased finance costs, partially offset by reduced production costs. Excluding the impact of the Entwistle Incident, net loss in Q4 2019 was $5.5 million.
Adjusted EBITDA1 totalled $11.3 million in Q4 2019, compared to $13.8 million in Q4 2018. The decrease is attributable to lower revenues in Q4 2019 compared to Q4 2018, increased distribution and sales, general, and administrative (“SG&A”) costs and an increase in other expenses. Excluding the impact of $3.2 million associated with the Entwistle Incident, as well as $2.0 million related to the adoption of IFRS 162, Q4 2019 Adjusted EBITDA1 was $6.1 million.
Fiscal 2019 Financial Results
Revenue for Fiscal 2019 totalled $377.8 million, an increase of 8.7% compared to $347.4 million for Fiscal 2018. The increase was primarily attributable to higher sales volumes mostly due to a full year of revenue contribution from the production and sale of pellets from the Smithers and Aliceville facilities, each of which contributed no production volume in Q1 – Q3 2018, offset by lower production volumes at our B.C. facilities due to sawmill curtailments and reductions in sawmill residual deliveries.
Adjusted Gross Margin1 was $65.0 million, or 17.2% of revenue in Fiscal 2019, compared to $67.6 million, or 19.5% of revenue in Fiscal 2018. The decrease in Adjusted Gross Margin1 Percentage was primarily attributable to an increase in revenues offset by an increase in production and distribution costs. Production costs include $7.3 million of costs associated with fixed overhead and incident response costs for the Entwistle Incident, offset by an amount of $13.0 million for business interruption insurance proceeds. Adjusted Gross Margin1 for Fiscal 2019 also reflects the Company’s adoption of IFRS 162. Excluding the impact of the implementation of IFRS 162 and the Entwistle Incident, Fiscal 2019 Adjusted Gross Margin1 was $51.5 million, or 13.6% of revenue.
The Company reported a net loss of $9.9 million in Fiscal 2019, compared to a net profit of $2.7 million in Fiscal 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 Entwistle Incident, net loss in Fiscal 2019 was $12.8 million.
Adjusted EBITDA1 totalled $47.2 million in Fiscal 2019, compared to $55.1 million in Fiscal 2018. Increased revenue was offset by higher distribution costs, higher production costs, including higher cash conversion costs (due primarily to fibre mix constraints which increased repair and maintenance costs), higher fibre costs due to extended sawmill curtailments in the B.C. region, and costs associated with the Entwistle Incident, partially offset by the impact of IFRS 162 and business interruption amounts recoverable. Excluding the impact of $3.9 million associated with the Entwistle Incident, as well as $7.8 million related to the adoption of IFRS 162, Fiscal 2019 Adjusted EBITDA1 was $35.5 million.
As at the end of Fiscal 2019, the Company had available liquidity of $57.1 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 Fiscal 2019, the ratio of net debt to last twelve months Adjusted EBITDA1 was 6.3 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, expansion projects at Williams Lake and Meadowbank, and initial construction costs of the High Level Facility that have not yet generated their run-rate Adjusted EBITDA1. As these facilities reach their run-rate capacity, this ratio is expected to decline.
Q1 2020 CN Rail Disruptions
- CN rail service has impacted the ability to effectively get product to port and has caused production disruption in Q1 2020.
- The January derailment in B.C. damaged Pinnacle leased railcars and resulted in some lost pellets. Full recovery of costs from CN is expected.
- The derailment caused service disruptions which impacted production output for a period of clean up for which we will not be compensated.
- Ten straight days of cold weather in January caused CN rail disruptions resulting in some facility downtime.
- In February CN rail lines and B.C. ports have been disrupted by blockades resulting in downtime at our northern facilities.
New Off-take Agreements
During the quarter, Pinnacle entered into a long-term, take-or-pay contract with Mitsui for 100,000 MTPA commencing in 2023.
This is the ninth contract 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 Demopolis, Alabama
In Q4 2019, Pinnacle announced the construction of a new industrial wood pellet production facility in the southeast United States, in close proximity to Pinnacle’s Aliceville facility. The new facility (the “Demopolis Facility”) will be located adjacent to an existing large sawmill in Demopolis, Alabama. The Demopolis Facility and Aliceville Facility will operate under a single partnership with Pinnacle, The Westervelt Company (“TWC”) and Two Rivers Lumber Company, LLC (“TRL”), each holding a 70%, 20% and 10% interest, respectively, and is expected to have annual production volume of 360,000 metric tonnes per annum (“MTPA”). Anticipated capital costs to construct the Demopolis Facility are expected to be approximately US$99 million, and Pinnacle will fund its portion of the capital costs from draws on its existing credit facilities. Commissioning the Demopolis Facility with initial industrial wood pellet production is expected in the second quarter of 2021.
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.
Production Facility Construction and Upgrades
Plans to install a chipper and additional pelleter at the Smithers facility have been finalized for a total capital cost of approximately $6.0 million (Pinnacle’s portion: $4.2 million funded from existing credit facilities). The upgrade will decrease costs and increase production run-rate output by approximately 15,000 MTPA. The project is expected to begin in Q1 2020, with completion expected in Q3 2020.
Construction at the High Level facility progressed in Q4 2019 and is now in a planned suspension due to winter weather conditions until spring 2020 when warmer temperatures will allow for efficient construction to continue. An additional capital requirement of $6.0 million is expected, bringing the total capital cost to $60.0 million, with Pinnacle’s 50% share being $30.0 million. Tolko has indicated that additional fibre will be available due to forest fire log processing, providing a strong supply of fibre for commissioning. As a result, Management is confident that this will enable the facility to produce at the upper end of the 170,000 MTPA to 200,000 MTPA range. The Facility is expected to be completed as planned in the fourth quarter of 2020.
The upgrades at our Williams Lake and Meadowbank facilities are progressing on schedule and are expected to be completed and begin commissioning in Q1 2020 and Q3 2020 respectively. The upgrades will allow the two facilities, to process a broader array of available fibre sources 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 an increase of 80,000 MTPA in combined overall production capacity.
At the Aliceville facility, 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 2019.
The Entwistle rebuild has been completed, the furnace and dryer have been restarted, and commissioning of the new equipment is in process.
Restoration of the facility is expected at a total estimated capital cost of approximately $14.0 million. Other costs are estimated to be approximately $9.5 million, of which $9.1 million has been incurred year-to-date. Pinnacle is actively working with customers and partners to mitigate the impacts of the 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 Q4 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 $9.0 million as at the end of Fiscal 2019 (net of deductibles). At the end of Fiscal 2019, a total of $13.0 million for business interruption insurance was recognised in net profit (loss) as a reduction of production costs, $4.5 million was recognised in Q4 2019. As at December 27, 2019 $8.5 million had been received in cash for business interruption insurance and $4.5 million had been included in other receivables.
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, some of which are currently underway, 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 recent restart of the Entwistle Facility and strong initial performance combined with the commissioning of the destoner will add production volume throughout the year, and an expected positive contribution to Adjusted EBITDA in 2020. Additionally, as the Aliceville and Smithers facilities are both operating at full run-rate production, incremental production volume and Adjusted EBITDA contribution is expected for 2020.
The above-mentioned derailment and blockade of CN rail service have continued to impact the ability to get production to port, and in some cases has caused production disruption in Q1 2020. We incurred additional costs to divert finished goods from our facilities for ship loading to different ports for some shipments. In Q1 2020 thus far we have lost 20kMT of production because of disruption to rail and port service, and we currently anticipate approximately two million dollars of Adjusted EBITDA will be missed in Q1 2020 as a result of the CN and port blockades and the subsequent rail delays.
Production output of Pinnacle’s B.C. sawmill suppliers has continued at consistently lower levels. Although current forecasts are for reduced stumpage costs for B.C. logs in mid-2020 and improved sawmill economics, Pinnacle continues to retain fibre inventories and employ other sourcing strategies to manage unforeseen disruptions.
While Pinnacle remains focused on improving fibre, fibre processing, haulage, and cash conversion costs, production and revenue are expected to continue to be impacted through 2020, as will the Adjusted Gross Margin¹ as our B.C. facilities continue to process a wider mix of harvest residuals.