Pinnacle reports record revenues of $132.2M in Q2 2020

Pinnacle Renewable Energy today reported record revenues of $132.2 million in Q2 2020, $28.1 million or 27 per cent higher than Q2 2019 revenues of $104.2 million and $21.5 million or 19 per cent 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 per cent of revenue in Q2 2020, an increase of $10.9 million relative to Q1 2020. AGM was $20.3 million or 19.5 per cent 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 five per cent 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 Pinnacle’s key goals of growth, profitability and sustainability of the business. The recovery from the Entwistle incident is now complete.  Investments are being made in both production efficiency and flexibility to enhance Pinnacle’s resilience to supply disruptions. Investments in new capacity will enable Pinnacle to capture the growth opportunities that are promised in Pinnacle’s substantial contract backlog. Pinnacle continues to diversify both its production base and its international market reach. The company fully expects continued growth in revenues and improvement in profit margins based on both expanded capacity and continued attention to costs.

Highlights in the quarter

Record production and sales volumes

Pellet sales set a new record in Q2 2020 at 620kMT, 21 per cent above the previous mark of 510kMT set in Q1 2020 and 30 per cent 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 per cent above Q1 2020 when the previous record was set, and 15 per cent 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 eight per cent 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, Alta., and Aliceville, Ala., 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.

Adjustments in procurement activities support operations; costs stable

Despite widespread sawmill curtailments in both Western Canada and the U.S. 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 per cent of the company’s feedstock in Q2 2020 compared with 81 per cent in Q1 2020 and harvest residuals and biologs accounted for 26 per cent versus 19 per cent. 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 per cent 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, Alta., being developed in partnership with Tolko Industries Inc.,(Pinnacle will own 50 per cent of the mill). Pinnacle contributed $5.5 million to the project in Q2 2020 bringing the project spend to approximately 50 per cent 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, Ala., being developed with The Westervelt Company and Two Rivers Lumber Company, LLC (Pinnacle will own 70 per cent of the mill). Pinnacle contributed $14.2 million to the Demopolis project in Q2 2020 bringing the project spend to approximately 30 per cent 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, Ala., 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 per cent complete at quarter-end.

Completion of the growth-related capital projects will increase Pinnacle’s overall production capacity by almost 20 per cent to 2.9 million MT, and increase the portion located in jurisdictions outside of B.C. to approximately 44 per cent.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.

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, ongoing 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.