By: The Working Forest Staff
VANCOUVER, CNW — Pinnacle Renewable has announced its financial results for the 13-week period (“Q4 2018”) and 52-week period (“Fiscal 2018”) ended December 28, 2018.
“We grew and diversified our customer base with nearly $3 billion in new, long-term contracts in Japan and South Korea,” said Rob McCurdy, CEO of Pinnacle. “Our same-facility production volume increased 3% in 2018, reflecting record performance at our Burns Lake and Lavington Facilities. However, our 2018 financial performance was negatively impacted by challenges commissioning the Entwistle Facility and rail service disruptions.”
Leroy Reitsma, COO of Pinnacle added, “We made strong progress in advancing our growth objectives in 2018, completing the construction of two new production facilities and acquiring the facility in Aliceville, which increases Pinnacle’s run-rate production capacity by more than 56%. While the fire event that occurred on February 11, 2019, at our Entwistle facility is of concern to everyone at Pinnacle, we are working diligently to resolve this incident and resume production.”
Fiscal 2018 Operating Highlights
- Sold a record volume of 1.6 million metric tons (“MT”) of industrial wood pellets;
- Secured six new long-term contracts with customers in Japan totaling $1.9 billion, including an additional contract in Q4 2018;
- Secured two new long-term contracts with CGN Daesan Power Co., Ltd. in South Korea totaling $1.0 billion, including an additional contract in Q4 2018;
- Grew contracted backlog to $5.9 billion at the end of Fiscal 2018, a 97% increase compared to the end of Fiscal 2017, and extended the weighted average remaining life of Pinnacle’s portfolio off-take contracts to nine years;
- Entered into commercial production at its facility in Entwistle, Alberta;
- Commenced initial production at its new 70% owned production facility in Smithers, B.C.; and
- Acquired a 70% stake in an industrial wood pellet production facility in Aliceville, Alabama, marking its entry into the U.S. Southeast fibre basket and the formation of a new strategic partnership with The Westervelt Company.
Q4 2018 Financial Results
Revenue for Q4 2018 totaled $103.7 million, an increase of 42.2% compared to $73.0 million for the 13-week period ended December 29, 2017 (“Q4 2017”). The increase was primarily attributable to increased sales volume. Industrial wood pellet sales volumes increased 41.6% to approximately 473,000 MT in Q4 2018, compared to approximately 334,000 MT in Q4 2017. Revenue in Q4 2018 was negatively impacted by lower production volumes than expected due to commissioning issues at the Entwistle Facility and challenges with the Company’s rail services provider.
Adjusted Gross Margin¹ was $16.7 million, or 16.1% of revenue, in Q4 2018 compared to $15.9 million, or 21.8% of revenue, in Q4 2017. The decrease in Adjusted Gross Margin Percentage¹ was primarily attributable to higher than expected production and cash conversion costs associated with the start-up at the Entwistle Facility, partially offset by higher revenue from increased sales volume.
Net profit and comprehensive income was $7.5 million in Q4 2018, compared to $0.1 million in Q4 2017. The variance was primarily attributable to a $7.7 million decrease in finance costs, partially offset by a $1.5 million increase in income tax expense.
Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”)¹ was $13.8 million in Q4 2018, an increase of 7.8% compared to $12.8 million in Q4 2017, reflecting increased revenue, partially offset by higher production costs associated with the start-up of the Entwistle Facility and increased logistics costs due to challenges with the Company’s rail services provider. Adjusted EBITDA for Q4 2018 was also impacted by constant heavy precipitation along the Pacific coast of British Columbia, which constrained loading volumes at the Company’s port terminals.
Fiscal 2018 Financial Results
Revenue for Fiscal 2018 totaled $347.4 million, an increase of 18.7% compared to $292.7 million for the 52-week period ended December 29, 2017 (“Fiscal 2017”). The increase was primarily attributable to increased sales volume and an increase in average sales price per MT. Industrial wood pellet sales volumes totaled approximately 1.6 million MT, compared to approximately 1.4 million MT in Fiscal 2017.
Adjusted Gross Margin¹ was $67.6 million, or 19.5% of revenue, in Fiscal 2018 compared to $66.9 million, or 22.9% of revenue, in Fiscal 2017. The decrease in Adjusted Gross Margin Percentage¹ was primarily due to higher production costs associated with start-up at the Entwistle Facility, planned higher fibre costs, and higher fibre costs for incremental production volume from the Company’s legacy production facilities as they increased production to offset the shortfall at the Entwistle Facility, partially offset by higher revenue from an increase in the average sales price per MT.
Adjusted EBITDA¹ was $55.1 million in Fiscal 2018, compared to $56.1 million in Fiscal 2017. The decrease was attributable to higher production costs associated with start-up at the Entwistle Facility and increased logistics costs due to challenges with the Company’s rail services provider, partially offset by increased revenue.
Recent Customer Wins
On December 14, 2018, Pinnacle entered into its second long-term, take-or-pay contract with CGN Daesan Power Co., Ltd. (“Daesan”), a subsidiary of CGN New Energy Holdings Co., Ltd, a diversified independent power producer in Asia. Under the terms of the contract, Pinnacle will supply 75,000 MTPA of industrial wood pellets to Daesan beginning in 2022.
On December 28, 2018, Pinnacle entered into its second long-term, take-or-pay contract with Sumitomo Corporation (“Sumitomo”), a large, diversified trading company in Japan. Under the terms of the contract, Pinnacle will supply 50,000 MTPA of industrial wood pellets to Sumitomo starting in the second half of 2020 for a one-year term. Following the initial one-year term, Pinnacle will supply a total of 150,000 MTPA to Sumitomo for the duration of the contract.
On February 11, 2019, Pinnacle temporarily suspended operations at its Entwistle Facility (the “Facility”) due to a fire and explosion that occurred at the dryer area of the Facility. The Company is currently investigating the cause of the incident and developing action plans to restart the facility. Pinnacle’s priority is to manage the impacts of the incident on its employees, contractors, customers, suppliers, and the neighboring community. Management, Alberta Labour Occupational Health & Safety (“OH&S”), local fire authorities, Pinnacle’s insurance adjusters and equipment suppliers, as well as third-party experts, are engaged in an investigation into the accident. OH&S released control of the site back to the Company on February 20, 2019.
Pinnacle is now working with its insurers, suppliers and contractors to evaluate the damage and develop a plan to restart the dryer area. The rest of the Facility sustained little damage and Pinnacle will resume production of wood pellets in March 2019 from dry fibre. The Company is working with its customers to mitigate the impact of the temporary suspension of operations at the Facility.
Prior to the incident, the Company was successfully ramping up the Facility. The storage silo is now fully operational and unit train delivery service commenced in Q4 2018. Fibre processing was improving and daily production rates were meeting the Company’s previously established ramp-up curve. Management expects consistent performance improvement once the Facility resumes production.
New Production Facilities
Pinnacle’s new Smithers Facility commenced production in November 2018 and is ramping production as anticipated at this stage of commissioning. Commercial production commenced December 29, 2018. The Aliceville Facility has been operating consistently since acquisition. The Aliceville and Smithers Facilities are positioned to contribute to Adjusted EBITDA growth in Fiscal 2019.
Pinnacle expects to see continued strong execution in the strategic growth plan of the business in 2019. The Aliceville and Smithers Facilities added in Q4 2018 will contribute to 2019 growth as they ramp up production.
Pinnacle is executing on its fibre diversification strategy. This has mitigated fibre availability issues resulting from sawmill curtailments that have been announced by some B.C. forest products companies. As a result, Pinnacle will procure a greater proportion of higher cost harvest residuals (pulp logs and bush grind). The Company expects the impact to be mainly limited to some of its fibre sourcing at its Burns Lake and Meadowbank Facilities.
The financial impact of the recent temporary suspension of operations at the Entwistle Facility is difficult to estimate at this early date. Pinnacle will resume reduced production of wood pellets at the Facility in March 2019 through the use of dry fibre. The Company will provide an update when it obtains further information regarding the timeline for recommencement of the dryer area. The Company anticipates providing 2019 guidance at that time.