Pinnacle reports "very successful" quarter, focus ahead on capacity increase
Canada's largest and the world's second largest wood pellet producer, Pinnacle Renewable Holdings Inc (Pinnacle) has announced its financial results for the 13-week period (Q2 2018) and 26-week period (YTD 2018) ended June 29, 2018. The company signed new long-term contracts totaling CA$2.2 billion with new customers in Asia during Q2 2018 including its first long-term contract in South Korea, representing the first long-term industrial wood pellet contract to ever be signed in that market.
According to a statement August 1, revenue for Q2 2018 totaled CA$85.1 million, an increase of 22.3 percent compared to CA$69.6 million in Q2 2017. The increase was attributable to higher sales volume, a higher proportion of Cost, Insurance, Freight (CIF) contracts, and higher-priced UK and European contracts.
With CIF contracts, Pinnacle procures and pays for shipping, which includes insurance and all other charges, up to the port of destination for the customer. These costs are included in the price charged to the customer and as such, are included in revenue and cost of distribution.
Industrial wood pellet sales volumes increased 16 percent to approximately 385 000 tonnes in Q2 2018, compared to approximately 332 000 tonnes in Q2 2017. Production costs were higher over the period as it managed the timing of the ramp-up of sales contracts and new production facilities through the purchase of higher cost, third-party pellets, though this was partially offset by increased average sales prices.
Bullish outlook with increased backlog
Pinnacle signed new long-term contracts totaling CA$2.2 billion with new customers in Asia during Q2 2018. The company secure four long-term, “take-or-pay” contracts with new customers in Japan, including Hanwa Co. Ltd., Sumitomo Corporation, and Toyota Tsusho Corporation.
Furthermore, it secured its first long-term contract in South Korea, with CGN Daesan Power Corp., representing the first long-term industrial wood pellet contract to ever be signed in that market.
With the inclusion of these new contracts, which have longer terms than Pinnacle’s existing contracts and extend past 2030, the weighted average remaining life of the company’s portfolio of off-take contracts with clients has increased from seven years as at March 30, 2018, to more than nine years as at June 29, 2018.
The company’s contracted backlog increased from CA$3.0 billion as at March 30, 2018, to CA$5.1 billion as at June 29, 2018. In short, the company has entered into long-term take-or-pay contracts with utilities in the UK, Europe, and Asia that represent 109 percent of its production capacity through 2021 and nearly 101 percent of its production capacity through 2026.
Focus on production capacity
With the new long-term supply agreements contracted in YTD 2018, Pinnacle says it is now focused on increasing its industrial wood pellet production capacity and expects to increase capacity at its existing facilities through its continuous improvement programs.
The company also now expects to expand its production capacity by advancing the development of greenfield and brownfield production facilities and indicated that it may also partially fulfill new contracted volumes through the acquisition of existing production facilities in North America.
On June 29, Pinnacle’s Entwistle production facility in Alberta (AB) entered into commercial production and the plant will gradually ramp-up production expecting to achieve full run-rate production of 400 000 tonnes per annum in the second quarter of 2019.
Construction of the new Smithers production facility in Smithers, British Columbia (BC) is underway and initial pellet production is expected to start in the fourth quarter of 2018. Full run-rate production of 125 000 tonnes per annum is anticipated in the third quarter of 2019.
We had a very successful quarter in securing long-term off-take contracts with new customers in Japan and South Korea, thereby diversifying our customer base, significantly growing our contracted backlog and further extending the weighted average remaining life of our contract portfolio. Our operations performed well in the quarter and we remain on track to meet our target of between CA$61 to CA$65 million in Adjusted EBITDA for Fiscal 2018. We continue to excel in safety at our facilities, including the commissioning of our new Entwistle production facility and the construction of the new Smithers facility, said Robert McCurdy, CEO, Pinnacle.