Pinnacle Renewable Energy Reports 2020 2nd Quarter Results

Higher Production and Shipments Contribute to Record Revenue and Improved Results

$26 million Contributed to Growth-Related Projects

Dividend of $0.0375 Per Share Declared

VANCOUVER, BC, Aug. 10, 2020 /CNW/ - Pinnacle Renewable Energy ("Pinnacle" or the "Company") (TSX: PL) today reported record revenues of $132.2 million in Q2 2020, $28.1 million or 27% higher than Q2 2019 revenues of $104.2 million and $21.5 million or 19% above the previous record of $110.7 million set in Q1 2020.

The increase in revenues in Q2 2020 results from an increase in production and shipment volumes at a number of the Company's facilities and improved logistics and port operations during the quarter.

The Company's Adjusted Gross Margin ("AGM") was $20.0 million or 15.1% of revenue in Q2 2020, an increase of $10.9 million relative to Q1 2020.  AGM was $20.3 million or 19.5% of revenue in Q2 2019.

Adjusted EBITDA increased $12.1 million in Q2 2020, coming in at $16.1 million, versus $4.0 million in Q1 2020 and increased 5% relative to the $15.3 million in Q2 2019, while net income was $0.02 million compared with a net loss of $9.1 million in Q1 2020 and net income of $1.5 million in Q2 2019.

STRATEGIC CONTEXT

The second quarter of 2020 was a significant step in the direction of achieving our key goals of growth, profitability and sustainability of our business.  The recovery from the Entwistle incident is now complete.  Investments are being made in both production efficiency and flexibility to enhance our resilience to supply disruptions.  Investments in new capacity will enable Pinnacle to capture the growth opportunities that are promised in our substantial contract backlog.  We continue to diversify both our production base and our international market reach.  We fully expect continued growth in revenues and improvement in profit margins based on both expanded capacity and continued attention to costs.

Pinnacle has earned its position in the top tier of the global wood pellet industry through consistent attention to quality, reliability of supply and service to our customers.  These priorities will continue to guide our business strategy into the future.

HIGHLIGHTS IN THE QUARTER

Record Production and Sales Volumes Contribute Positively to Results

Pellet sales set a new record in Q2 2020 at 620kMT, 21% above the previous mark of 510kMT set in Q1 2020 and 30% above Q2 2019.  Included in the current quarter were 23kMT of externally-produced pellets purchased under annual contracts and 50kMT of spot purchases.  Production in Q2 2020 set new records as well coming in at 518kMT, 14% above Q1 2020 when the previous record was set, and 15% above Q2 2019.  The results in the current quarter were achieved in spite of operational disruptions at the Lavington, Meadowbank and Smithers mills that negatively impacted production by 18kMT.   Viewed on a per day basis, production in Q2 2020 came in at 5,694 MT versus 4,967 MT in Q1 2020 and 4,959 MT in Q2 2019. The gains in productivity achieved in Q2 2020 contributed to an 8% reduction in unit production costs compared with Q1 2020 and made a positive impact on the Company's results in the quarter.

Alberta and Alabama Mills Make Significant Contribution

Pinnacle's mills at Entwistle, Alberta and Aliceville, Alabama made significant contributions to the Company's production and shipment volumes in Q2 2020 and to the Company's financial performance in the quarter.  At Entwistle, fibre quality improvements associated with the recent destoner project, along with a number of other initiatives, helped to boost pelleter efficiency, building on the gains achieved in the previous quarter.  Production at Entwistle was 33% above Q1 2020 and 235% above the same quarter last year.  Aliceville also performed significantly better in Q2 2020 as efforts to improve machine centre reliability gained traction.  Production at Aliceville increased by 14% versus Q1 2020 and by 37% compared to Q2 2019.  Additional gains are expected at both mills as operating programs are fine-tuned.

Entwistle Insurance Proceeds Received; Settlement Discussions Ongoing

A total of $6.0 million in insurance proceeds attributable to Entwistle and recorded in accounts receivable in Q1 2020 was received in Q2 2020.  No new amounts have been recorded in Q2 2020 as we continue discussions for final settlement. In Q2 2019 $4.5 million of business interruption insurance recoveries were booked as an offset of production costs.

Adjustments in Procurement Activities Support Operations; Costs Stable

Despite widespread sawmill curtailments in both Western Canada and the US South at the beginning of the quarter, Pinnacle was able to adjust its procurement activities to gain access to the volume and quality of fibre needed to operate without disruption.  Sawmill residuals accounted for 74% of the Company's feedstock in Q2 2020 compared with 81% in Q1 2020 and harvest residuals and biologs accounted for 26% versus 19%.  Overall fibre costs were flat quarter-over-quarter reflecting Pinnacle's growing experience in dealing with non-traditional sources of raw material.  The Company's investment in fibre inventories, which was built-up in late 2019 and in Q1 2020 to support operations in the event of further reductions in the supply of sawmill residuals, was reduced by 17% in Q2 2020 as sawmills produce at more consistent levels of output, providing greater comfort in available fibre supply.

PROGRESS ON GROWTH-RELATED PROJECTS

Capital expenditures net of non-controlling interests on growth-related projects amounted to $25.9 million in the quarter compared with $19.3 million in Q1 2020 and $4.9 million in the same period last year as the Company continued to drive forward with initiatives to build out and diversify its operating platform. 

In terms of individual projects, construction continued during the quarter on the new 200kMT per year mill at High Level, Alberta, being developed in partnership with Tolko Industries Inc (Pinnacle will own 50% of the mill).  Pinnacle contributed $5.5 million to the project in Q2 2020 bringing the project spend to approximately 50% completion. In addition, plans for the associated rail infrastructure at High Level were finalized recently at a projected net cost of $3.3 million, which will be split between the partners.  The project remains on schedule for commissioning in Q4 2020.  

Construction also continued during the quarter on the 360kMT per year mill in Demopolis, Alabama, being developed with The Westervelt Company and Two Rivers Lumber Company, LLC (Pinnacle will own 70% of the mill).  Pinnacle contributed $14.2 million to the Demopolis project in Q2 2020 bringing the project spend to approximately 30% completion.  The project is scheduled for commissioning in Q2 2021.

During the quarter, the dryer upgrade project at Williams Lake was successfully completed.  A total of $2.6 million was invested at Williams Lake in the quarter.  The new dryer is currently in its commissioning phase and is expected to achieve run-rate production levels in Q3 2020, adding more than 60kMT to the mill's capacity on an annualized basis.

The Company also commenced construction on the Phase 2 Project at its mill in Aliceville, Alabama in Q2 2020.  This project will add a truck unloading system to the mill's infrastructure and broaden access to additional supplies of sawmill residuals on a go-forward basis, supporting the Company's goal of boosting production volumes at that mill.  Pinnacle contributed $0.7 million to the Aliceville project in Q2 2020, with the project spend approximately 21% complete at quarter-end.

Completion of the growth-related capital projects will increase Pinnacle's overall production capacity by almost 20% to 2.9 million MT, and increase the portion located in jurisdictions outside of B.C. to approximately 44%.With a number of small projects currently on hold due to COVID-related concerns, Pinnacle's contribution to capital spending during the second half of 2020 is expected to be in the range of $70.0 to $75.0 million.

CREDIT FACILTY AMENDED

On June 29, 2020 Pinnacle announced it had reached agreement with the members of its banking syndicate to modify the financial covenant headroom in its credit facility through the end of Q2 2021 and to extend access to the delayed draw credit facility until the end of June 2021. These amendments were put in place out of an abundance of caution and are designed to provide the Company with additional flexibility from both an operating and a capital spending standpoint during the period of uncertainty associated with the COVID-19 pandemic.

OUTLOOK

Customer demand for wood pellets remains strong. Management expects production and shipment volumes to increase in Q3 2020 as the Entwistle mill operates at capacity, the Williams Lake mill works through its commissioning process, and a series of initiatives designed to boost operating rates at other mills are implemented.  Warmer weather is expected to support higher production levels as well.  Fibre supply is expected to improve in the next few months as sawmill operating rates are maintained. Pinnacle's order backlog remains strong at $6.8 billion MT.

That said, on-going uncertainties associated with COVID-19, including reports of higher positive test results in areas in which we operate or source fibre, have the potential to impact our operations and the availability and cost of feedstock.

Barring a deterioration in the business environment due to COVID-19 or other factors, the construction of the Company's growth-related projects will continue as planned.

DIVIDEND

The Company's Board of Directors today approved the payment of a dividend of $0.0375 per Common Share.  Payment will be made on September 4, 2020 to shareholders of record as at August 20, 2020.

FINANCIAL AND OPERATING HIGHLIGHTS

		Q2 2020	Q2 2019	Q2 2020	Q2 2019
	Unit	13 weeks	13 weeks	26 weeks	26 weeks
Revenue	$000's	132,246	104,164	241,921	193,791
Profit before finance costs and other income (expense)	$000's	7,124	5,185	658	1,530
Net income (loss)	$000's	17	1,546	(9,115)	(5,460)
Impact of Entwistle Incident	$000's	-	532	1,782	(1,034)
Net income (loss) (excluding above impact)	$000's	17	1,014	(10,897)	(4,426)
Net profit (loss) per share attributable to owners
Basic and diluted earnings/(loss) per share	$/share	(0.04)	0.04	(0.30)	(0.16)
Adjusted Gross Margin ^(1)	$000's	19,955	20,346	28,949	30,712
Adjusted Gross Margin per MT ^(1)	$/MT	32.19	42.56	25.62	34.90
Adjusted Gross Margin Percentage ^(1)	%	15.1%	19.5%	12.0%	15.8%
Adjusted EBITDA ^(1)	$000's	16,108	15,280	20,152	22,339
Adjusted EBITDA per MT ^(1)	$/MT	25.98	31.97	17.83	34.61
Adjusted EBITDA Percentage ^(1)	%	12.2%	14.7%	8.3%	11.5%
Free Cash Flow ^(1)	$000's	10,122	6,319	8,985	6,910
Annualized Return on Invested Capital^(1)	%	12.4%	14.0%	7.8%	10.2%
Annualized Cash Flow Return on Assets^(1)	%	13.6%	7.6%	10.0%	10.0%
				June 26, 2020	December 27, 2019
Total Assets	$000's			661,632	629,911
Total Debt	$000's			357,440	309,588
		Q2 2020	Q2 2019	Q2 2020	Q2 2019
Operating Highlights		13 weeks	13 weeks	26 weeks	26 weeks
Industrial wood pellets produced ^(2)	MT('000)	518	451	970	858
Industrial wood pellets purchased ^(3)	MT('000)	73	21	97	45
Industrial wood pellets sold	MT('000)	620	478	1,130	880
				June 26, 2020	December 27, 2019
Contracted Backlog ^(4)
Fiscal 2020 (remainder of Fiscal year)	$ billions			0.3	0.4
Fiscal 2021	$ billions			0.5	0.5
Fiscal 2022 and thereafter	$ billions			6.0	6.0
Total product sales under Contracted Backlog	$ billions			6.8	6.9

(1)	See "Non-IFRS Measures" for the definition of the items discussed below and as well as reconciliations of non-IFRS measures with the most directly comparable IFRS measure.
(2)	Includes MT produced by all facilities managed by Pinnacle, including HPLP.
(3)	Includes MT sold in the quarter that were purchased from third parties, excluding HPLP.
(4)	We enter into long-term, take-or-pay off-take contracts with large and well capitalized counterparties or their affiliates. "Contracted Backlog" represents the revenue to be recognised under existing contracts assuming deliveries occur as specified in the contracts. As a result of customer preferences or logistics management, there can be movement in the timing of deliveries that may result in revenue being recognised in either a preceding or following interim fiscal period.

LIQUIDITY AND CAPITAL RESOURCES

Net debt ended the quarter at $373.1 million resulting in available liquidity of $187.9 million.  This compares with net debt of $375.6 million and liquidity of $187.9 on March 27, 2020.  As at June 26, 2020 the Company had sufficient liquidity and was in compliance with all debt covenants.

The following table summarizes the Company's credit facilities and availability as of June 26, 2020:

(in thousands $)		Revolver Loan		Term Loan	Delayed Draw Loan		Total
Available line of credit and maximum borrowing available		65,000		278,600	185,000		528,000
Less:
Drawings		-		278,600	82,300		360,900
Unused portion of facility		65,000		-	102,700		167,700
Add:
Cash and cash equivalents		-		-	-		19,845
Available liquidity at June 26, 2020		65,000		-	102,700		187,945

The revolver loan, term loan and delayed draw loan have a maturity date of June 14, 2024.

NON-IFRS MEASURES

This release refers 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. 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.

The following measures are used by management as key performance indicators for our business: Adjusted Gross Margin Percentage, Adjusted EBITDA, Free Cash Flow, Annualized Return on Invested Capital and Annualized Cash Flow Return on Assets. Please refer to Management's Discussion and Analysis for the thirteen- and twenty-six-week periods ended June 26, 2020.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

FOR THE 13-WEEK AND 26 WEEK PERIODS ENDED JUNE 26, 2020

	13-week periods ended		26-week periods ended
	June 26, 2020	June 28, 2019	June 26, 2020			June 28, 2019
Revenue	132,246	104,164	241,921		193,791
Costs and expenses
Production	95,888	70,903	182,017		138,024
Distribution	14,930	13,005	29,491		25,771
Selling, general and administration	4,511	5,147		9,168	8,940
Amortization of equipment and intangible assets	9,793	9,924		20,587	19,526
	125,122	98,979		241,263	192,261
Operating income	7,124	5,185		658	1,530
Other income/(expense)
Equity earnings/(loss) in Houston Pellet Limited Partnership	(269)	395		(557)	707
loss on disposal of property, plant and equipment	(855)	(67)		(876)	(97)
Impairment of Entwistle plant	-	-		-	(9,417)
Impairment of Intangibles	-	-		-	(278)
Insurance recovery for property loss at Entwistle plant	-	5,000		2,500	8,000
Finance costs	(6,247)	(7,753)		(14,593)	(14,526)
Other income	236	(337)		440	6,956
	(7,135)	(2,762)		(13,086)	(8,655)
Net profit/(loss) before income taxes	(11)	2,423		(12,428)	(7,125)
Income tax recovery/(expense)
Deferred	28	(877)		3,313	1,665
	28	(877)		3,313	1,665
Net profit/(loss)	17	1,546		(9,115)	(5,460)
Net profit/(loss) attributable to:
Owners of the Company	(1,187)	1,241		(10,022)	(5,451)
Non-controlling interests	1,204	305		907	(9)
	17	1,546		(9,115)	(5,460)
Net loss per share attributable to owners (Basic and diluted):	(0.04)	0.04		(0.30)	(0.16)
Weighted average of number of shares outstanding (thousands):	33,359	33,300		33,357	33,170

	13-week periods ended		26-week periods ended
	June 26, 2020	June 28, 2019	June 26, 2020	June 28, 2019
Net profit/(loss)	17	1,546	(9,115)	(5,460)
Other comprehensive income (loss) net of taxes:
Items that may be recycled through net income:
Foreign exchange translation of foreign operations, net of tax	(3,085)	(731)	2,720	(1,198)
Comprehensive income/(loss) for the period	(3,068)	815	(6,395)	(6,658)
Comprehensive income (loss) attributable to:
Owners of the Company	(3,346)	191	(8,118)	(6,968)
Non-controlling interests	278	624	1,723	310
	(3,068)	815	(6,395)	(6,658)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE 13-WEEK AND 26 WEEK PERIODS ENDED JUNE 26, 2020

	13-week periods ended		26-week periods ended
	June 26, 2020	June 28, 2019	June 26, 2020	June 28, 2019
Cash provided by (used in)
Operating activities
Net profit/(loss)	17	1,546	(9,115)	(5,460)
Financing costs, net	6,247	7,753	14,593	14,526
Distributions from Houston Pellet Limited Partnership	-	-	-	2,400
Insurance received for business interruption at Entwistle plant	3,500	-	6,400	-
Realized gain on derivatives and foreign exchange	1,011	512	1,121	997
Items not involving cash:
Amortization of equipment and intangible assets	9,793	9,924	20,587	19,526
Equity earnings/(loss) in Houston Pellet Limited Partnership	269	(395)	557	(707)
Loss on disposal of equipment	855	67	876	97
Stock-based compensation	26	461	231	629
Inventory write down	311	263	3,437	590
Impairment of Entwistle plant	-	-	-	9,417
Impairment of intangible assets	-	-	-	278
Insurance recoverable recorded in income for Entwistle plant	-	(6,500)	(3,500)	(9,500)
Deferred income tax recovery	(28)	952	(3,313)	(1,665)
Cash flow from operating activities	22,001	14,583	31,874	31,128
Net change in non-cash operating working capital	14,151	(6,507)	16,077	(12,798)
	36,152	8,076	47,951	18,330
Financing activities
Drawings on revolver loan	68,800	-	123,000	-
Repayment of revolver loan	(79,800)	(16,500)	(142,200)	(18,450)
Payment of finance leases	(2,578)	(2,385)	(5,039)	(4,715)
Drawings on term debt	-	277,973	-	277,973
Repayment of term debt	(1,400)	(192,000)	(1,400)	(194,000)
Drawings on delayed draw loan	28,200	(49,760)	62,300	(49,760)
Proceeds from exercise of stock options	-	-	243	221
Dividends paid during the period	(1,250)	(4,995)	(6,254)	(9,946)
Investment from non-controlling interest	5,833	-	7,610	1,350
Distributions to non-controlling interest	-	(250)	(362)	(550)
Finance costs paid	(4,179)	(4,945)	(8,900)	(8,589)
	13,626	7,138	28,998	(6,466)
Investing activities
Insurance recovery for property loss at Entwistle plant	2,500	-	3,500	-
(Increase)/ decrease in restricted cash	85	-	(2,770)	-
Purchase of property, plant and equipment	(35,453)	(13,942)	(69,095)	(20,236)
Proceeds from sale of property, plant and equipment	-	53	24	86
	(32,868)	(13,889)	(68,341)	(20,150)
Foreign exchange gain on cash position held in foreign currency	(113)	(8)	(30)	85
Increase (decrease) in cash and cash equivalents	16,797	1,317	8,578	(8,201)
Cash and cash equivalents, beginning of the period	3,048	8,510	11,267	18,028
Cash and cash equivalents, end of the period	19,845	9,827	19,845	9,827

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

As at	June 26, 2020	December 27, 2019
ASSETS
Current assets
Cash and cash equivalents	19,845	11,267
Accounts receivable	37,284	36,764
Inventory	36,994	46,938
Receivable against NMTC debt	-	12,774
Other current assets	8,310	11,436
Total current assets	102,433	119,179
Property, plant and equipment	444,715	399,181
Goodwill and intangible assets	98,923	100,191
Restricted cash	2,770	-
Investment in Houston Pellet Limited Partnership	6,991	7,548
Other long-term assets	43	1,364
Deferred income taxes	5,757	2,448
Total assets	661,632	629,911
LIABILITIES AND EQUITY
Current liabilities
Revolver loan	-	19,200
Accounts payable and accrued liabilities	57,482	51,183
Current portion of long-term debt	15,050	4,200
Current portion of NMTC debt	-	12,774
Current portion of lease liabilities	7,545	7,424
Other current liabilities	822	1,786
Total current liabilities	80,899	96,567
Long-term debt	342,390	292,614
Other long-term liabilities	6,521	2,462
Lease liabilities	27,989	29,551
Total liabilities	457,799	421,194
Equity
Shareholders' Equity
Common shares	278,053	277,619
Contributed surplus	4,228	4,145
Accumulated Other Comprehensive Income/(loss)	584	(1,320)
Deficit	(133,467)	(117,191)
Total equity attributable to owners of the Company	149,398	163,253
Non-controlling interest	54,435	45,464
Total equity	203,833	208,717
Total liabilities and equity	661,632	629,911

Pinnacle's unaudited interim consolidated financial statements and Management's Discussion & Analysis for Q1 2020 and its Annual Information Form for the Fiscal Year ended December 27, 2019 are available on the Company's website at pinnaclepellet.com or on SEDAR at www.sedar.com.

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.

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.

(1) NON-IFRS FINANCIAL MEASURES

This news release makes reference to certain non-IFRS measures. Please see page 13 of the Management's Discussion and Analysis for definition.

FORWARD-LOOKING INFORMATION

This news release includes "forward-looking information" within the meaning of applicable securities laws in Canada. Forward-looking information may relate to our future financial outlook and anticipated events or results and may include information regarding our financial position, business strategy, growth strategies, budgets, operations, financial results, taxes, dividend policy, plans and objectives. Particularly, information regarding our expectations of future results, performance, achievements, prospects or opportunities or the markets in which we operate is forward-looking information. Some of the specific forward-looking information contained herein include, but are not limited to, statements with respect to: our expectations regarding growth in biomass-based fuel sources within the European and Asian power generating portfolio; growth in global demand for wood pellets; anticipated supply delivery times under our off-take contracts; anticipated capital cost and maintenance capital expenditures required by our facilities; COVID-19 and anticipated production from our facilities.

Many factors could cause our actual results, level of activity, performance or achievements or future events or developments to differ materially from those expressed or implied by forward-looking statements, including, without limitation, the factors discussed in the "Financial Risk Factors" section of the MD&A and in the "Risk Factors" section of our Annual Information Form ("AIF") dated March 31, 2020, which can be accessed under the Company's profile on SEDAR at www.sedar.com. The Company cautions that the list of risk factors and uncertainties described herein and in the AIF are not intended to represent a complete list of the factors that could affect us. Readers are urged to consider such risks, uncertainties and factors carefully in evaluating the forward-looking information, and are cautioned to not place undue reliance on such information.

The forward-looking information contained in this news release represents our expectations as of the date of this press release (or as of the date they are otherwise stated to be made) and are subject to change after such date. We disclaim any intention or 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.

FOFI contained in this document was made as of the date hereof and was provided for the purpose of providing shareholders with information on Pinnacle's financial outlook. Pinnacle disclaims any intention or obligation to update or revise any FOFI contained in this document, whether as a result of new information, future events or otherwise, unless required pursuant to applicable securities laws in Canada. Readers are cautioned that the FOFI contained in this document should not be used for purposes other than for which it is disclosed herein.

SOURCE Pinnacle Renewable Energy Inc.

Investor Relations, Pinnacle Renewable Energy, Tel: [phone], Email: [email protected], Web: www.pinnaclepellet.com

Related Links

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