Record Production Volumes Contribute to Best Quarterly Performance
Dividend of
The increase in revenues in Q3 2020 versus the comparable quarter in 2019 results from higher production volumes at a number of the Company's facilities during the quarter.
The Company's Adjusted Gross Margin(1) ("AGM") increased by
Adjusted EBITDA(1) was
STRATEGIC CONTEXT
The positive momentum we experienced in the second quarter of 2020 ("Q2 2020") continued into Q3 2020 in spite of the many challenges associated with the on-going COVID-19 pandemic, resulting in the best quarterly performance in the Company's history. Pinnacle's strategy of investing in both new capacity and production efficiency has delivered strong gains in productivity and cost reductions while setting the stage for the Company to grow its revenue base and profitability.
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, along with the goals of delivering outstanding returns to our shareholders, safe and rewarding careers for our employees, and economic and environmental benefits for the communities in which we operate, will continue to guide our business strategy into the future. We also gain comfort knowing that our products play a role in addressing the challenges of global climate change.
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1 See "Non-IFRS Measures" for definition of the items discussed below and as well as reconciliations of non-IFRS measure with the most directly comparable IFRS measures. |
FACTORS IMPACTING THIRD QUARTER, 2020
Warmer Weather, Lower Fibre Costs and Returns From Capital Investments Drive Record Production and Profitability
The combination of warmer and drier weather, lower fibre costs and the returns associated with the Company's capital investment activities contributed to record production and profitability in Q3 2020. Pellet production in Q3 2020 was 587 kMT, 69 kMT or 13% above our previous record of 518 kMT in Q2 2020, and 145 kMT or 33% higher than Q3 2019. Viewed on a per day basis, production in Q3 2020 was 6,449 MT versus 5,694 MT in Q2 2020 and 4,852 MT in Q3 2019.
Strong performance gains were recorded at a number of plants in Q3 2020 led by
Sawmill residuals increased to 84% of the Company's feedstock in Q3 2020 compared with 74% in Q2 2020 as the strong lumber market resulted in higher operating rates in that sector. Overall, our fibre costs were down 2% quarter-over-quarter. During the quarter, we reduced our fibre inventories by 10% due to our increased confidence regarding the availability of sawmill residuals.
The combination of lower fibre costs, higher mill-level productivity and the benefits of warmer and drier weather contributed to a 7% reduction in our unit production costs quarter-over-quarter. This reduction in production costs contributed to a 46% increase in AGM in Q3 2020, net of the influences of insurance proceeds, versus Q2 2020 and a similar increase in Adjusted EBITDA, the highest recorded by the Company.
Logistics Issues Negatively Impact Results
The Company's results in Q3 2020 were achieved in spite of service failures at CN Rail ("CN") and the
Entwistle Insurance Settlement Completed
In Q3 2020, we reached a final settlement with respect to an insurance claim related to the previously disclosed incident that occurred at the dryer area of our
PROGRESS ON GROWTH-RELATED CAPITAL PROJECTS
Capital expenditures net of non-controlling interests on growth-related projects amounted to
High Level Construction Advancing; Capital for Rail Infrastructure Authorized
- Construction of the new 200k MT mill at
High Level, Alberta advanced during Q3 2020. The 200k MT per year mill will be 50% owned by Pinnacle and 50% owned byTolko Industries Inc. ("Tolko"). - The project remains on schedule for commissioning in the fourth quarter of 2020.
- Production readiness processes are well advanced including staff training.
- Additional costs incurred to advance the project during periods of significant rain, improve engineering design and enhanced safety will add an additional
$6.8 million to the project which will be split evenly between Pinnacle and Tolko. Despite the extra costs incurred in the construction ofHigh Level , management is confident that this project will generate acceptable returns. - The total cost of the project, including associated rail infrastructure, is
$70.6 million , with Pinnacle's 50% share amounting to$35.3 million . Pinnacle contributed$7.9 million to the project in Q3 2020, bringing the Company's total project expenditures to$23.4 million or approximately 66% of budgeted costs.
- Construction also continued during the quarter on the 360 kMT per year mill in
Demopolis, Alabama . The mill will be owned and operated byAlabama Pellets LLC , in which Pinnacle has a 70% interest. - Good progress was made in the quarter on underground services, foundations and structural steel for the hammermill and pellet buildings, hammermill and dryer area mechanical installations, and the domes for pellet storage. The project is progressing as planned, with commissioning expected in the second quarter of 2021.
- The total authorized capital spend for the project is
$135.0 million , with Pinnacle's 70% share amounting to$94.6 million . Pinnacle contributed$13.1 million to the project in Q3 2020, bringing total project expenditures to$39.9 million or approximately 42% of budgeted costs.
Aliceville Phase 2 Project Nearing Completion
- The Company completed the Phase 2 Project at its mill in
Aliceville, Alabama in early October. The mill is owned and operated byAlabama Pellets LLC , in which Pinnacle has a 70% interest. This project adds a truck unloading system to the mill's infrastructure and broadens access to additional supplies of sawmill residuals on a go-forward basis, supporting the Company's goal of boosting production volumes at the mill. Pinnacle contributed$2.0 million on theAliceville project in Q3 2020, bringing total expenditures to approximately$3.9 million or 78% of budget at quarter-end.
Meadowbank WESP Upgrade Restarted
- The Meadowbank WESP upgrade, which was halted temporarily during the initial stages of the COVID-19 outbreak, was restarted during the quarter. This upgrade will enhance the operating flexibility of the facility and allow Pinnacle to continue to adapt to cyclical changes in wood fibre supply within the B.C. Interior. The upgrade is expected to increase the mill's production capacity by 30 kMT per annum.
- The project is progressing as planned and is on-budget, with commissioning expected in the fourth quarter of 2020 ("Q4 2020").
- The total authorized capital spend for the project is
$9.5 million . Pinnacle spent$2.4 million on the project in Q3 2020, bringing total project expenditures to-date to$5.6 million or approximately 59% of budgeted costs.
Completion of these projects is expected to increase Pinnacle's overall production capacity by almost 20% to 2.8 million MT, and increase the production comprised by facilities located in jurisdictions outside of B.C. to approximately 44%.
NEW CEO APPOINTED
On
OUTLOOK
Customer demand for wood pellets remains strong. In Q4 2020 we expect to see positive year-over-year production increases as the Entwistle Facility operates at full capacity, benefits are realized from the upgrades at
With respect to the COVID-19 pandemic, on-going uncertainties including reports of higher positive test results in areas in which we operate, 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
FINANCIAL AND OPERATING HIGHLIGHTS
Unit | Q3 2020 13 weeks | Q3 2019 13 weeks | Q3 2020 39 weeks | Q3 2019 39 weeks | ||
Revenue | 131,674 | 92,552 | 373,594 | 286,343 | ||
Profit before finance costs and other income (expense) | 15,409 | 3,031 | 16,064 | 4,561 | ||
Net income (loss)(5) | 7,740 | (1,459) | (1,377) | (6,919) | ||
Net profit (loss) attributable to owners | 6,946 | (1,695) | (3,076) | (7,146) | ||
Basic and diluted earnings/(loss) per share | $/share | 0.21 | (0.05) | (0.09) | (0.21) | |
Adjusted Gross Margin (1)(6) | 31,744 | 17,851 | 60,693 | 48,563 | ||
Adjusted Gross Margin per MT (1)(6) | $/MT | 52.91 | 42.20 | 35.08 | 37.27 | |
Adjusted Gross Margin Percentage (1)(6) | % | 24.1% | 19.3% | 16.2% | 17.0% | |
Adjusted EBITDA (1)(7) | 26,054 | 13,553 | 46,205 | 35,891 | ||
Adjusted EBITDA per MT (1)(7) | $/MT | 43.42 | 32.04 | 26.71 | 27.54 | |
Adjusted EBITDA Percentage (1)(7) | % | 19.8% | 14.6% | 12.4% | 12.5% | |
Free Cash Flow (1)(7) | 18,392 | 7,310 | 26,015 | 18,410 | ||
Annualized Return on | % | 19.6% | 11.3% | 11.5% | 10.1% | |
Annualized Cash Flow Return on Assets (1) | % | 16.7% | 9.8% | 12.4% | 10.3% | |
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Total Assets | 703,390 | 629,911 | ||||
Total Debt | 374,796 | 316,014 | ||||
Q3 2020 13 weeks | Q3 2019 13 weeks | Q3 2020 39 weeks | Q3 2019 39 weeks | |||
Operating Highlights | ||||||
Industrial wood pellets produced (2) | MT ('000) | 587 | 422 | 1,557 | 1,299 | |
Industrial wood pellets purchased (3) | MT ('000) | 15 | 33 | 121 | 62 | |
Industrial wood pellets sold | MT ('000) | 600 | 423 | 1,730 | 1,303 | |
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Contracted Backlog (4) | |||||||||||||
Fiscal 2020 (remainder of Fiscal year) | $ billions | 0.1 | 0.4 | ||||||||||
Fiscal 2021 | $ billions | 0.6 | 0.5 | ||||||||||
Fiscal 2022 and thereafter | $ billions | 6.0 | 6.0 | ||||||||||
Total product sales under Contracted Backlog | $ billions | 6.7 | 6.9 |
Notes | |||||||
(1) See "Non-IFRS Measures" for definition of the items discussed below and as well as reconciliations of non-IFRS measure with the most directly comparable IFRS measures. (2) Includes MT produced by all facilities managed by Pinnacle, including (3) Includes MT sold 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 recognized 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 recognized in either a preceding or following interim fiscal period. (5) For the 13- week and 39-week period ended (6) For the 13- week and 39-week period ended (7) For the 13- week and 39-week period ended | |||||||
LIQUIDITY AND CAPITAL RESOURCES
Net debt (current and long term debt, current and long term lease liabilities, offset by cash and cash equivalents) at
The following table summarizes the Company's credit facilities and availability as of
Revolver | Term Loan | Delayed | Total | ||
Available line of credit and maximum borrowing available | 65,000 | 280,000 | 185,000 | 530,000 | |
Mandatory Amortization | - | 4,200 | - | 4,200 | |
Drawings | - | 280,000 | 102,200 | 378,200 | |
Unused portion of facility | 65,000 | - | 82,800 | 147,800 | |
Add: | |||||
Cash and cash equivalents | - | - | - | 21,762 | |
Available liquidity at | 65,000 | - | 82,800 | 169,562 |
The revolver loan, term loan and delayed draw loan each have a maturity date of
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, Net Debt to
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE 13-WEEK AND 39-WEEK PERIODS ENDED
Note | 13-week periods ended | 39-week periods ended | |||
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Revenue | 14 | 131,674 | 92,552 | 373,594 | 286,343 |
Costs and expenses | |||||
Production | 83,500 | 60,189 | 265,517 | 198,213 | |
Distribution | 15,970 | 14,457 | 45,462 | 40,228 | |
Selling, general and administration | 7 | 5,342 | 4,808 | 14,511 | 13,748 |
Amortization of equipment and intangible assets | 11,453 | 10,067 | 32,040 | 29,593 | |
116,265 | 89,521 | 357,530 | 281,782 | ||
Operating income | 15,409 | 3,031 | 16,064 | 4,561 | |
Other income/(expense) | |||||
Equity earnings/(loss) in | 334 | 181 | (223) | 888 | |
Gain/(loss) on disposal of property, plant and equipment | 149 | (188) | (727) | (285) | |
Impairment of | - | - | - | (9,417) | |
Impairment of Intangibles | - | - | - | (278) | |
Insurance recovery for property loss at | 1,143 | - | 3,643 | 8,000 | |
Finance costs | 8 | (5,965) | (4,813) | (20,558) | (19,339) |
Other (expense)/income | (425) | (64) | 15 | 6,892 | |
(4,764) | (4,884) | (17,850) | (13,539) | ||
Net profit/(loss) before income taxes | 10,645 | (1,853) | (1,786) | (8,978) | |
Income tax (expense)/recovery | |||||
Deferred | 9 | (2,905) | 394 | 409 | 2,059 |
(2,905) | 394 | 409 | 2,059 | ||
Net profit/(loss) | 7,740 | (1,459) | (1,377) | (6,919) | |
Net profit/(loss) attributable to: | |||||
Owners of the Company | 6,946 | (1,695) | (3,076) | (7,146) | |
Non-controlling interests | 794 | 236 | 1,699 | 227 | |
7,740 | (1,459) | (1,377) | (6,919) | ||
Net profit/(loss) per share attributable to owners (basic and diluted): | 10 | 0.21 | (0.05) | (0.09) | (0.21) |
Weighted average of number of shares outstanding (thousands): |
10 | 33,357 | 33,307 | 33,358 | 33,220 |
13-week periods ended | 39-week periods ended | ||||
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| ||
Net profit/(loss) | 7,740 | (1,459) | (1,377) | (6,919) | |
Items that may be recycled through net income: | |||||
Foreign exchange translation of foreign operations, net of tax | (2,297) | 754 | 423 | (493) | |
Comprehensive income/(loss) for the period | 5,443 | (705) | (954) | (7,412) | |
Comprehensive income/(loss) attributable to: | |||||
Owners of the Company | 5,338 | (1,169) | (2,780) | (8,002) | |
Non-controlling interests | 105 | 464 | 1,826 | 590 | |
5,443 | (705) | (954) | (7,412) |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 13-WEEK AND 39-WEEK PERIODS ENDED
13-week periods ended | 39-week periods ended | ||||
Note |
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| |
Cash provided by (used in) | |||||
Operating activities | |||||
Net profit/(loss) | 7,740 | (1,459) | (1,377) | (6,919) | |
Financing costs, net | 8 | 5,965 | 4,813 | 20,558 | 19,339 |
Distributions from | - | - | - | 2,400 | |
Insurance received for business interruption at | 13 | - | 4,500 | 6,400 | 4,500 |
Realized gain on derivatives and foreign exchange | 8 | 510 | 499 | 1,631 | 1,496 |
Items not involving cash: | |||||
Amortization of equipment and intangible assets | 11,453 | 10,067 | 32,040 | 29,593 | |
Equity (earnings)/loss in | (334) | (181) | 223 | (888) | |
(Gain)/loss on disposal of equipment | (149) | 188 | 727 | 285 | |
Stock-based compensation | 6 | 173 | 255 | 404 | 884 |
Inventory write (up)/down | 3 | (92) | 677 | 3,346 | 1,267 |
Impairment of | - | - | - | 9,417 | |
Impairment of intangible assets | - | - | - | 278 | |
Insurance recoverable recorded in income for | 13 | (3,759) | (4,000) | (7,259) | (16,500) |
Deferred income tax expense/(recovery) | 9 | 2,905 | (394) | (409) | (2,059) |
Cash flow from operating activities | 24,412 | 14,965 | 56,284 | 43,093 | |
Net change in non-cash operating working capital | 11 | (18,453) | (6,216) | (2,373) | (19,014) |
5,959 | 8,749 | 53,911 | 24,079 | ||
Financing activities | |||||
Drawings on revolver loan | 74,200 | 12,000 | 197,200 | 12,000 | |
Repayment of revolver loan | (74,200) | - | (216,400) | (18,450) | |
Payment of finance leases | (2,333) | (2,648) | (7,372) | (7,363) | |
Drawings on term debt | - | - | - | 277,973 | |
Repayment of term debt | (2,800) | - | (4,200) | (194,000) | |
Drawings on delayed draw loan | 19,900 | - | 82,200 | (49,760) | |
Proceeds from exercise of stock options | - | 47 | 243 | 268 | |
Dividends paid during the period | (1,251) | (4,996) | (7,506) | (14,942) | |
Investment from non-controlling interest | 6,834 | 666 | 14,444 | 2,016 | |
Distributions to non-controlling interest | - | (175) | (362) | (725) | |
Finance costs paid | 8 | (4,681) | (4,082) | (13,581) | (12,671) |
15,669 | 812 | 44,666 | (5,654) | ||
Investing activities | |||||
Insurance recovery for property loss at | 13 | - | 5,000 | 3,500 | 8,000 |
Decrease/(increase) in restricted cash | 57 | - | (2,713) | - | |
Purchase of property, plant and equipment | 11 | (19,942) | (16,113) | (89,037) | (36,349) |
Proceeds from sale of property, plant and equipment | 88 | 70 | 112 | 156 | |
(19,797) | (11,043) | (88,138) | (28,193) | ||
Foreign exchange gain/(loss) on cash held in foreign currency | 86 | (10) | 56 | 75 | |
Increase/(decrease) in cash and cash equivalents | 1,917 | (1,492) | 10,495 | (9,693) | |
Cash and cash equivalents, beginning of the period | 19,845 | 9,827 | 11,267 | 18,028 | |
Cash and cash equivalents, end of the period | 21,762 | 8,335 | 21,762 | 8,335 | |
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at | Note | ||||
ASSETS | |||||
Current assets | |||||
Cash and cash equivalents | 21,762 | 11,267 | |||
Restricted cash | 2,713 | - | |||
Accounts receivable | 53,936 | 36,764 | |||
Inventory | 3 | 38,853 | 46,938 | ||
Receivable against NMTC debt | - | 12,774 | |||
Other current assets | 6,233 | 11,436 | |||
Total current assets | 123,497 | 119,179 | |||
Property, plant and equipment | 4 | 470,864 | 399,181 | ||
98,829 | 100,191 | ||||
Investment in | 7,324 | 7,548 | |||
Other long-term assets | 20 | 1,364 | |||
Deferred income taxes | 9 | 2,856 | 2,448 | ||
Total assets | 703,390 | 629,911 | |||
LIABILITIES AND EQUITY | |||||
Current liabilities | |||||
Revolver loan | 5 | - | 19,200 | ||
Accounts payable and accrued liabilities | 69,610 | 51,183 | |||
Current portion of long-term debt | 5 | 17,236 | 3,128 | ||
Current portion of NMTC debt | - | 12,774 | |||
Current portion of lease liabilities | 7,716 | 7,424 | |||
Other current liabilities | 1,132 | 1,786 | |||
Total current liabilities | 95,694 | 95,495 | |||
Long-term debt | 5 | 357,560 | 293,686 | ||
Other long-term liabilities | 6,548 | 2,462 | |||
Lease liabilities | 28,602 | 29,551 | |||
Total liabilities | 488,404 | 421,194 | |||
EQUITY | |||||
Shareholders' equity | |||||
Common shares | 6 | 278,076 | 277,619 | ||
Contributed surplus | 4,335 | 4,145 | |||
Accumulated other comprehensive loss | (1,024) | (1,320) | |||
Deficit | (127,773) | (117,191) | |||
Total equity attributable to owners of the Company | 153,614 | 163,253 | |||
Non-controlling interest | 61,372 | 45,464 | |||
Total equity | 214,986 | 208,717 | |||
Total liabilities and equity | 703,390 | 629,911 |
Pinnacle's unaudited interim consolidated financial statements and Management's Discussion & Analysis for Q3 2020 and its Annual Information Form for the Fiscal Year ended
ABOUT PINNACLE
Pinnacle is the third largest producer of industrial wood pellets in the world. The Company's products are used to displace fossil fuels in the production of baseload electrical power in key markets around the world. Pinnacle is a trusted supplier to its customers who require reliable, high quality fuels to maximize the utilization of their facilities. The Company operates eight production facilities in
CONFERENCE CALL
Pinnacle will host a conference call for investors and analysts on
http://pinnaclepellet.com/investors/presentations-events
To access a replay of the conference call dial 416-764-8677 or 1-888-390-0541, passcode: 662261#. The replay will be available until November 17, 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 12 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
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
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
Future-oriented financial information ("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
SOURCE
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