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Edited Transcript of PL.TO earnings conference call or presentation 12-May-20 3:00pm GMT

·51 mins read

Q1 2020 Pinnacle Renewable Energy Inc Earnings Call Jun 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Pinnacle Renewable Energy Inc earnings conference call or presentation Tuesday, May 12, 2020 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Andrea Louise Johnston Pinnacle Renewable Energy Inc. - CFO * Robert McCurdy Pinnacle Renewable Energy Inc. - CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Benoit Laprade Scotiabank Global Banking and Markets, Research Division - Director of Paper & Forest Products and Diversified Industries * David Francis Newman Desjardins Securities Inc., Research Division - Analyst * Ian Brooks Gillies Stifel GMP Research - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure * Jonathan Lamers BMO Capital Markets Equity Research - Analyst * Mark Thomas Jarvi CIBC Capital Markets, Research Division - Director of Institutional Equity Research * Nelson Ng RBC Capital Markets, Research Division - Analyst * Rupert M. Merer National Bank Financial, Inc., Research Division - MD and Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen, and welcome to the Pinnacle Renewable Energy, Inc. Q1 2020 Quarterly Results Conference Call. (Operator Instructions) This call is being recorded on Tuesday, May 12, 2020. I would now like to turn the conference over to Robert McCurdy, please go ahead. -------------------------------------------------------------------------------- Robert McCurdy, Pinnacle Renewable Energy Inc. - CEO & Director [2] -------------------------------------------------------------------------------- Thank you very much. Good morning, and thank you for joining us. With me on the line today is Andrea Johnston, our CFO. We've posted a supplementary slide deck for the call this morning, which is available on our website or the webcast link. I'm starting the call today with a few key business developments and operational update on the first quarter, then Andrea will follow-up with a review of our financial results. Then, we would welcome questions after that. Our Entwistle facility was online for the first full quarter of production since last year. We've achieved increased production levels during the quarter with exceeding the commission rate target curve for the facility and the facility gave us positive contributions on EBITDA during the quarter. We expect -- and we're quite pleased with this facility and continue to see the improvements and added production throughout the year. On the construction side, we successfully broke ground at Demopolis in Southeast United States during the quarter and progressed -- this is progressing on plan and on budget. The plant should begin commissioning in the second quarter of next year. Once fully commissioned, we expect 360,000 tons per year of pellet production. Additionally, we resumed construction at the High Level facility in Alberta as planned in March after the arrival of warmer weather. This facility is expected to be completed as planned in the fourth quarter, and we are confident that it will produce 200,000 metric tons per year of pellets. During the quarter, we entered into a long-term lease with NYK to charter a vessel that will be used to carry wood pellets from Canada to Japan. This vessel lease contributes to our strategy for growth in the Japanese market, begins in the first quarter of next year for a period of 15 years. The logistics model we're using will provide ourselves and our customers with the widest possible delivery flexibility at the lowest possible cost. In the first quarter, our business saw lower-than-expected EBITDA, primarily resulted from higher production costs due to higher fiber and rail costs as well as high cost of Q4 '19 inventory that was sold in the quarter. This inventory included high fiber costs consumed in Q1, the sale of third-party pellets as well as costs associated with the rail strike in Q4 and the blockades in Q1. During February, we experienced heavy rains in our U.S. Southeast region with nearly 13 inches of rain falling in 1 month. This impacted our Aliceville facility. The Tombigbee River breached over the banks and into the dock area, the barges could not dock or be loaded for approximately 2 weeks. The silos were full. Proactively, we took down the facility for 5 days. The negative impact on the margin was also due to prolonged storage of pellets in the barges. Additionally, we saw higher costs in the quarter, while managing the impact of CN Rail disruptions as well as higher port costs. Specifically, in January, we had a derailment, where we lost lease cars, lost pellets and had service disruptions at our plant, while CN cleaned up the derailment. And in February, we had curtailed production due to the blockades of the CN Rail in the north, which disrupted and shut down plants as well as disrupting shipping schedules. This impact was approximately 20,000 metric tons of lost production with an impact of $2.1 million on EBITDA. We were able to recover the cost from CN for lost production on the derailment, but had not been compensated for the impact on production losses during the service disruptions. I'm happy to report both the flooding issue and the CN disruptions have been resolved. March, we saw operational progress with solid production volumes and cost performance. From an overall production perspective, as Pinnacle has been deemed essential service, we have not seen a significant impact on the demand of pellets due to the outbreak of COVID-19. However, we've had increased absence of employees and a change in the BC fiber mix that resulted in some increased costs. We haven't lowered our production volumes or production rate at our facilities, and we remain focused on working safely while practicing the recommended COVID-19 practices. I will add that with the emergence of COVID-19 and the resulting supply interruptions and international travel restrictions affecting on-site presence of external experts, some of the smaller projects have been proactively delayed to preserve capital and to enforce the safety standards. Before I hand it over to Andrea, as you may have seen in the news release yesterday, as many other companies have done with this global economy and crisis, and in order to ensure the company is well positioned to withstand the ongoing economic impacts of COVID-19 health threats and to preserve liquidity for growth capital, we made a difficult but prudent decision to revise the dividend to $0.15 per share per year during this period. This decision was not made as a result of a change in demand of industrial pellets, but however the lumber industry, particularly in BC, is under pressure as the economy continues to be under stress. This will, in turn, impact our fiber supply and increase our costs. I'll now turn it over to Andrea. -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [3] -------------------------------------------------------------------------------- Thanks, Rob, and good morning, everyone. Before I begin with the financial summary of the quarter, I'd like to remind participants that this call contains forward-looking statements and non-IFRS financial measures, both of which are more fully described in our published MD&A for the quarter. Revenue for the first quarter of 2020 totaled $109.7 million, an increase of 22.4% compared to Q1 a year ago, resulting primarily from higher sales volume. CIF sales in Q1 were 1.2% lower than Q1 2019 and accounted for 48% of total sales this quarter, which also contributed to a shift of revenue in Q1 2020 compared to 2019. We also experienced shipping delays due to the CN Rail strike in the fourth quarter last year that resulted in a shift of revenue into Q1. Production costs were $86.1 million in the quarter, an increase of 28.3% compared to $67.1 million in Q1 last year. The increase was primarily due to an increase in sales volume and higher fiber and rail costs as well as the high cost of Q4 inventory that we sold in Q1 2019. Additionally, production costs were up due to the impact of the CN Rail blockades. The higher costs were partially offset by lower cash conversion costs. Distribution costs for the quarter were $14.6 million, an increase of 14.1% from last year, with a $1.8 million increase -- the result of increased revenue as well as higher port charges and demurrage costs resulting from scheduled shipping delays due to the CN Rail disruptions. Our $0.9 million increase in SG&A expenses in the quarter was due to a $0.1 million increase in IT costs and capitalization in 2019 of $0.6 million for professional fees and $0.1 million for business development with no such credit in 2020. We recorded a net loss of $4.1 million in Q1 2020 compared to a net loss of $7 million in Q1 last year. The change reflects reduced financial -- finance costs, partially offset by higher SG&A costs, production and distribution costs, and amortization costs that reflect the company's new production facilities. Excluding the impact of the Entwistle incident, the net loss in Q1 2020 was $5.9 million. Adjusted gross margin in the quarter was $9 million or 8.2% of revenue compared to $10.4 million or 11.6% of revenue in Q1 last year. The decrease in adjusted gross margin percentage was primarily due to an increase in operating loss. This was partially offset by increases in SG&A and amortization expenses in Q1. Production costs in the quarter include $500,000 of costs associated with fixed overhead and incident response costs for the Entwistle incident. These costs are offset by $1 million of business interruption insurance receivable recorded in Q1 2020. Excluding the impact of the Entwistle incident, adjusted gross margin was $8.5 million. Free cash flow for Q1 2020 was negative $1.1 million compared with $0.6 million from Q1 last year. The decrease is primarily due to a decrease of $3.1 million in adjusted EBITDA, a $0.6 million increase in interest costs and a $2 million amortization charge in 2019 that was not in Q1 2020. Our maintenance CapEx for Q4 was $0.5 million, up from $0.4 million in Q1 a year ago. At quarter end, we had cash and equivalents of $3 million and available liquidity of $57.1 million. At the end of Q1, the ratio of net debt to last 12 months adjusted EBITDA was 7.7x. This ratio was impacted because our growth CapEx has been slower than expected due to COVID-19, offset by the lower EBITDA in Q1, while investment in new capacity from the Entwistle facility and the expansion projects at Williams Lake, Meadowbank, High Level and Demopolis have not yet generated their run rate EBITDA. As these facilities reach their run rate capacity, we expect these ratios to decline. We continue to be compliant with our bank covenants and maintain sufficient liquidity to execute on our business plan. As we move into Q2, we will see improvements from Entwistle and seasonality of the business, but there is a risk of headwinds with COVID-19, so we maintain an active dialogue with our supportive syndicate of lenders about covenant flexibility. Adjusted EBITDA totaled $4 million for the quarter compared to $7.1 million in Q1 a year ago, with the decrease attributed to higher production costs resulting from increased sales volume, the sale of external finished pellet inventory and costs incurred to manage the impact of the CN Rail disruptions as well as higher port charges due to blockades. Before turning the call over to Rob, I'd like to provide a summary on the Entwistle facility. As Rob mentioned, we had our first full quarter of operations following the restart and achieved positive EBITDA contribution in the quarter. The destoner is commissioning well and working as intended. Strong production results are providing support for a continued discussion with our insurers for our business interruption insurance claim. In Q1, we recorded amounts receivable in the statement of financial position of $2.5 million for property claim insurance proceeds receivable and $1 million for business interruption insurance proceeds receivable. We expect substantially all costs incurred to be recoverable through insurance. I'll now turn the call back over to Rob for some closing comments. -------------------------------------------------------------------------------- Robert McCurdy, Pinnacle Renewable Energy Inc. - CEO & Director [4] -------------------------------------------------------------------------------- Thank you. Before I wrap up, I'd like to share with you that we had a small fire at our Lavington facility on Monday night, and we take this very seriously. No one was hurt, and the safety systems worked as they're supposed to. This reinforces our commitment and our drive and our passion to focus on owning safety. The plant will restart today. The CN Rail issues experienced in the quarter have not impacted service since that time. Progress was made in March with a solid production volume and cost performance as the previous impacted facilities were able to operate continuously without any operational disruptions. With respect to COVID-19, we do not expect any change in demand for pellets as we have long-term take-or-pay contracts with our customers with fixed pricing and fixed volumes that are fully contracted to our production capability. In the event of any power change in power consumption with our customers, we expect to use decrease of coal to be brought down instead of the renewables. However, sawmills and key fiber suppliers started to curtail output as a result of impact of COVID-19 on their businesses. During April, our plants ran very well, and we had a very strong shipping month. We had expected and planned for to be more dependent on harvest residuals in 2020. We will continue to address the fiber breakdown capital and operating requirements to meet our needs now and in the future. As the portion of wet course fiber to dry fiber increases, we may experience some drying capacity constraints at some of our BC mills. This may result in an impact on the adjusted gross margin. Beyond April, as Q2 2020 continues, we see the BC residual supplier stabilizing as the lumber market continues to improve, government incentives have been enacted, and also the industry in BC looks forward to the reduction of stumpy rate starting in July of this year. We continue to invest in strategic fiber inventories, and at the end of the quarter, we had built up enough fiber inventory to sustain 2.6 months of production activity at our BC facilities, an increase of 0.6 months since the end of Q4. We continue to have very good fiber availability in Alberta for Entwistle. And although there's been some sawmill curtailments in Alabama, we do not expect production volumes or cost to be significantly impacted as a result of this. So I'd like to thank you, and open it up for questions right now. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question today is from Rupert Merer from National Bank. -------------------------------------------------------------------------------- Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [2] -------------------------------------------------------------------------------- Looking at the results in Q1 before distribution costs, it seems we've had a drop in pricing by a few percent, and that, of course, has an impact on your margins. When you talk about the pricing dynamic, what drove that year-over-year change in prices? And what should we be expecting for the balance of the year? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [3] -------------------------------------------------------------------------------- Rupert, indeed, in Q1, we did have a decline in the average sales price per metric ton, and that can be impacted to -- from a few factors. One of them is the mix of the CIF versus FOB contracts, where we have a CIF contract, the shipping costs are actually recorded in revenue and the corresponding costs are actually recorded down on the distribution line. So we can see per metric ton fluctuations based on that. Also, the mix in the various sales contracts that we have and the proportion of volume shipped in the quarter can shift that as we have a variety of different contracts that were negotiated at different points in time. Going forward, we do have contracted increases in our sales contracts for each year that we've negotiated. So we would expect to see on an annual basis, an increase in the revenue per metric ton over time. -------------------------------------------------------------------------------- Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [4] -------------------------------------------------------------------------------- All right. Do you expect to see a material increase this year relative to Q1? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [5] -------------------------------------------------------------------------------- Yes, we would. -------------------------------------------------------------------------------- Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [6] -------------------------------------------------------------------------------- Okay. And then secondly, looking at your evolution towards the use of more harvest residuals. Wondering if you can give us some color on how much harvest residuals you were using in Q1? And with a little more experience now, where do you think you can get to on cost relative to where you were a couple of years ago? And how long would it take you to get there? -------------------------------------------------------------------------------- Robert McCurdy, Pinnacle Renewable Energy Inc. - CEO & Director [7] -------------------------------------------------------------------------------- So I'll start, and Andrea will kick in as well. So there's really 2 things we look at. One is -- it's actually 3 components. One, we knew that during the spring season in British Columbia that potentially we would have some sawmills that would be slowing down. So we had built up some strategic inventory and to protect us on that. So that's part of our strategic inventory that we'd already built up and that's been very useful. The other piece was that we've gone a long way at looking at the plants and working with the plants on how to adjust to this diet. Another good example of that would be Williams Lake. We're going to be able to tie in Williams Lake this week. We delayed it because of COVID, but we've been able to find ways of remotely testing out some of the equipment with vendors. And that will give us some extra drawing capacity, then allows us to use that fiber mix much more effectively and much better cost profile for that plant. So I think the other one that we're starting to see is that we saw a series of reductions of sawmills due to COVID in early April. Now we're seeing that stabilize, and some of them have come back, other ones have delayed. And also, we're seeing some recovery in their markets as well. So we watch that very closely. And that -- then make sure that the residuals flow well to the plants. -------------------------------------------------------------------------------- Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [8] -------------------------------------------------------------------------------- So how much residuals are you using today as a percentage of your overall fiber demand? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [9] -------------------------------------------------------------------------------- So it can really vary from facility to facility as you can imagine. Since Q3 of 2019, when we did see a decline in sawmill residuals, we have seen it go up to more than single digits in terms of the use of harvest residuals. And that was particularly evident over the Christmas break time, which, as we commented, some of the sawmills that provide us with a steady diet of shavings and sawdust most of the year took extended shuts over the Christmas break because of poor economics. And so during Q1, we had the impact of an even greater proportion of harvest residuals than we would expect on an ongoing basis. -------------------------------------------------------------------------------- Rupert M. Merer, National Bank Financial, Inc., Research Division - MD and Research Analyst [10] -------------------------------------------------------------------------------- And sorry, on the cost, where do you think the cost can get to? Should we see long-term trend of costs coming down or is that uncertain? -------------------------------------------------------------------------------- Robert McCurdy, Pinnacle Renewable Energy Inc. - CEO & Director [11] -------------------------------------------------------------------------------- So long-term cost will come down. What I see is the guys have developed very good tools to be able to arbitrage different fibers and what the cost of fiber is all the way through the pellet, including R&M costs and the impact on that. And also now we have a broader network, so we're able to choose some fiber types over other fiber types depending on the constraints at that particular mill. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Your next question comes from David Newman from Desjardins. -------------------------------------------------------------------------------- David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [13] -------------------------------------------------------------------------------- Maybe I can tackle Rupert's question in a different way. So the gross margin per ton, I think last year you ran close to $40 per metric ton post IFRS. So if you -- as you transition through the quarter, given the shift towards harvest residuals, and you noted that you had lower costs at month-over-month throughout the quarter, so how do the gross margins kind of play out overall within the quarter to kind of get a sense of where you're at today. -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [14] -------------------------------------------------------------------------------- Sure. So within the quarter, there's a couple of key factors that we pointed out is Q1 historically is a lower quarter per ton -- margin per metric ton quarter because of weather in Northern BC for starters. Is -- additionally, we commented, we had a pretty high proportion of what we shipped was actually sitting in finished goods inventory at the end of Q4. And that was higher cost because of the impacts of the strike that we had in Q4 and the fact that, again, Q4 is a higher cost quarter. So first off, margins impacted by what you're shipping as opposed to what you're producing, so it reflected that high volume. And then in January and February, with both the CN disruptions and the impact of Aliceville flooding as well as that extended Christmas shut by some of the sawmills, you had some of the more expensive cash conversion costs. Additionally, there is a factor that is probably not as well understood, which is really how our fiber flows through our system. We commented in Q3 that we were having to work very quickly to deal with the sawmill curtailments that were announced in Q3 of 2019. That resulted in us going out and buying harvest residuals at farther distances and higher cost to make sure that we had sufficient fiber in front of the plants. Some of that worked its way into Q4 2019 pellets produced, which worked their way into Q1 2020 pellets sold, and so are more reflective of that higher cost basis. As we get into Q2, typically the margins do improve just by virtue of warmer weather, less drying time and drying costs, but we'll also see the benefit of the work that the team has done to find lower cost, easier to process harvest residuals for the mills. -------------------------------------------------------------------------------- David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [15] -------------------------------------------------------------------------------- Okay. So do you think, given the current curtailments, et cetera, and using more harvest residuals, do you think you can get back to last year's level by 3Q, 4Q kind of thing? Or how are you thinking about just the gross margins? Just as we model this out, we're trying to think about where you could end up? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [16] -------------------------------------------------------------------------------- Yes. Certainly, we're getting some very good signs now from lumber prices in the market. I think we've all seen some announcements come out recently. So we -- but we remain cautious about how much we need to have in terms of inventories of harvest residuals just to buffer that. I'd say we expect that to the extent that we're using more harvest residuals, we do expect those to be more expensive than that to 2018 when we had a greater proportion of sawmill residuals. But we did have the impacts in Q3 2019 and Q4 2019. So year-over-year, all things being equal in a COVID-19 world, we would expect to see margin levels that are somewhat comparable. -------------------------------------------------------------------------------- David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [17] -------------------------------------------------------------------------------- Okay. And then in the quarter, you had 30% of the pellets shipped were the high cost pellets from last year, and there was third party. How much did the third-party comprise of that? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [18] -------------------------------------------------------------------------------- The third-party was certainly a smaller proportion than our Q4 2019 owned pellets. But it all comes in to impact that margin percentage. -------------------------------------------------------------------------------- David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [19] -------------------------------------------------------------------------------- If you had internalized all that and you had at today's cost levels, you did $4 million EBITDA. What do you think, in terms of attribution, where you might have been? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [20] -------------------------------------------------------------------------------- David, I can't really do that, that what if, I don't think. -------------------------------------------------------------------------------- David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [21] -------------------------------------------------------------------------------- Okay. And then flipping -- switching gears, just on CapEx. Aliceville and High Level are proceeding. You've got some modest deferrals. Your total CapEx envelope for this year, for 2020 and 2021, should it be similar to what we've been modeling in the past? Or do you expect that to come down a little bit? And will you use the incremental CapEx for further fiber breakdown capital? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [22] -------------------------------------------------------------------------------- So David, first and foremost, we expect to be able to continue to -- with the construction of High Level and Demopolis safely and work very hard to keep those on schedule as we've sold the pellets that will be produced from those facilities. And that's the majority of our CapEx spend that everybody has been projecting for the year. The Williams Lake project is largely spent, and we have -- but we do have some cash outflows to continue with that. As you mentioned, we have deferred some of our smaller projects both in terms of preserving the liquidity, but also in terms of making sure that those plants continue to operate safely. We've also taken steps to reduce our maintenance CapEx to focus on just those projects that are necessary for safety CapEx or for operational continuity. So I would think you should see some reduction compared to what you're planning. But you do point out with what we are observing very carefully, which would be continued curtailments of sawmills in BC, we'll make sure and stay on top of our fiber breakdown CapEx requirements. The good success that we're seeing out at the Entwistle destoner in terms of the reduction in cash conversion cost that we're experiencing and even the ability to continue longer production cycles without maintenance R&M programs shows a good payback. So that is -- we'll constantly look at those good return programs. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Your next question comes from Nelson Ng from RBC Capital Markets. -------------------------------------------------------------------------------- Nelson Ng, RBC Capital Markets, Research Division - Analyst [24] -------------------------------------------------------------------------------- Just a quick follow-up on some of the questions earlier. Are there any -- you mentioned that the high-cost inventory was sold in Q1, which was produced or purchased in Q4. Are there any high-cost inventory remaining at the end of Q1 that would be sold in Q2? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [25] -------------------------------------------------------------------------------- There is some that would have been produced in January, February, that would be higher cost. But our inventory levels at port were definitely much lower in -- at the end of March than they were at the end of December. As we -- you all know, we can have very variable inventory levels at port and in transit at any given point in time. Q4 2019 was pretty unusual. I think CN Rail was still getting over some of the interaction in its service flows. So we had more goods in transit as well as sitting at port. Now that we ship out of 3 different ports on a year-over-year basis, we can have more inventory at port as well. But it's -- March production costs, given the higher production levels, flow through of some of the lower cost fiber procured later in the post curtailment period should mean that we should see less impact of that in Q2 2020. -------------------------------------------------------------------------------- Nelson Ng, RBC Capital Markets, Research Division - Analyst [26] -------------------------------------------------------------------------------- Okay. And then just on that, in terms of the strategic fiber inventory, when that is used -- or when some of that is used this quarter, would that essentially result in high cost or at least higher cost production as well? Is that a fair way of thinking about it? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [27] -------------------------------------------------------------------------------- It could, depending on the site and the facility. We use the strategic fiber inventories in a couple of ways. Some of it, we keep at facilities, and we don't use it regularly in production unless there were to be a sudden announcement that was unanticipated, and we wanted to make sure and have some fiber in front of it. In other cases, our inventories are used more on an ongoing basis in our production. And for the most part, as I said, the higher cost, less return fiber that was purchased when we saw the sudden curtailments in Q3 '19, for the most part, we've worked through that, and we're now -- our inventories reflect better cost and better production capability fiber. -------------------------------------------------------------------------------- Nelson Ng, RBC Capital Markets, Research Division - Analyst [28] -------------------------------------------------------------------------------- Okay. Got it. And then just moving over to Entwistle. Now that things have been kind of ramping up nicely, and I guess the facility has been kind of operating to some degree for over a year, I was just wondering, does the original business plan of generating roughly $20 million of EBITDA, is that still -- does that still seem achievable? Like has anything changed there from an economics perspective? -------------------------------------------------------------------------------- Robert McCurdy, Pinnacle Renewable Energy Inc. - CEO & Director [29] -------------------------------------------------------------------------------- So I'm going to jump in. So we're extraordinarily pleased with this plan and the team there and everything. To give them credit, the restart happened in November of last year on the dryer system, and it exceeded our expectations on the ramp-up curve. And we're very pleased, as we said, that it produced positive EBITDA in the first quarter and continues to ramp up and be above that curve that we expected. To speak for Andrea, we don't -- we will not -- we have no expectation that, that plant will be anything but what we said in the business plan. And all indications are that it's heading that way quite nicely. -------------------------------------------------------------------------------- Nelson Ng, RBC Capital Markets, Research Division - Analyst [30] -------------------------------------------------------------------------------- Okay. And then just moving over to High Level and Demopolis. In terms -- I think roughly the Pinnacle share of the investment is roughly $100 million. Roughly, what is remaining? Is it close to 80% or 90% in terms of what is left to be invested from Pinnacle? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [31] -------------------------------------------------------------------------------- It would be approximately 80%. As you recall, we just broke ground on Demopolis in Q1. And while we strive to pay our vendors on time and per contractual requirements, we have a methodical way of paying for the work as it gets completed and is acceptable. So even on High Level, which is planned to be producing pellets by Q4, there's still a significant amount of capital to come. -------------------------------------------------------------------------------- Nelson Ng, RBC Capital Markets, Research Division - Analyst [32] -------------------------------------------------------------------------------- Okay. And then in terms of funding that capital, is it your expectation that most of it will come from the delayed draw facility? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [33] -------------------------------------------------------------------------------- Yes. As you remember, we renegotiated a $185 million delayed draw facility in June of 2019. And as of the end of Q1, we had drawn $54 million of that. So we still have quite a bit available, and we would expect that certainly for those 2 facilities, that would be the primary source of funding. -------------------------------------------------------------------------------- Nelson Ng, RBC Capital Markets, Research Division - Analyst [34] -------------------------------------------------------------------------------- Okay. And is there any -- you mentioned that you are -- with respect to your covenants, you are kind of meeting your covenants. But is there like any -- I'm just wondering how available that facility is based on like if you've breached any your covenant -- like is there -- if there's a potential breach of covenants over the next year or so, like how available is that facility? Or is it very specific to projects under construction? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [35] -------------------------------------------------------------------------------- So we work very closely with a syndicate of lenders. They're well aware of the projects that we have underway, the economics of those projects. And of course, we share with them forecast of our business as we go forward and maintain an open dialogue. So we would expect to work with them closely on maintaining full availability of that facility to fund the completion of capital. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- Your next question comes from Jonathan Lamers from BMO Capital Markets. -------------------------------------------------------------------------------- Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [37] -------------------------------------------------------------------------------- Rob, you mentioned that employee absenteeism has been a bit of an issue post COVID. But then you went on to say that overall production in April has been quite strong. So are you concerned that, that could have a material impact on operations going forward? -------------------------------------------------------------------------------- Robert McCurdy, Pinnacle Renewable Energy Inc. - CEO & Director [38] -------------------------------------------------------------------------------- No, I would like to give Scott and the team a lot of credit, and all the employees at Pinnacle a lot of credit, that we worked very hard to make sure everybody is safe and also keep the plant safe and isolated. During when COVID first started moving through, we had higher absenteeism with employees and there was concern. And about flu season going through and potential COVID with family saw -- we saw greater absenteeism in that period, and we encourage people to stay home rather than come to work sick. So that certainly -- I mentioned that because it spread at some of the plants, but the plants did amazing job. We set production -- weekly production records for the entire fleet in that period and a record shipping production -- shipping in that period as well. So March, April, from a production and shipping standpoint was very good. -------------------------------------------------------------------------------- Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [39] -------------------------------------------------------------------------------- And I know there's been a lot of discussion about fiber costs today. I'm just trying to sort out all the comments. So on the one hand, Bob, you highlighted that we should expect incremental use of harvest residuals over the balance of the year, and that, that wouldn't have an impact on margins. I think during the Q&A, you mentioned that use of harvest residuals was up about single digits in Q1. Do you have a view as to approximately what range of increase of harvest residuals we should expect over the balance of 2020? -------------------------------------------------------------------------------- Robert McCurdy, Pinnacle Renewable Energy Inc. - CEO & Director [40] -------------------------------------------------------------------------------- So there's really 2 factors. One is that -- and we've modeled out many different cases. One is, if there's no COVID impact and the sawmills operated the way we had expected and planned, that's one scenario. We've also done other scenarios where if COVID gets worse, and we've modeled how would we get fiber and what would that cost of fiber. What we've seen now is a more stabilizing effect and it's more stabilizing effect with the sawmills in British Columbia. And that's helpful to us because it gives us a more stabilized ramp of how much residuals are coming in. So it's closer to the scenario that we painted pre-COVID as these plants start to stabilize, and there's a few sawmills that are still down. -------------------------------------------------------------------------------- Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [41] -------------------------------------------------------------------------------- That's helpful. So just to answer my question, if in the no COVID impact scenario, would use of harvest residuals be similar to the Q1 experience? -------------------------------------------------------------------------------- Robert McCurdy, Pinnacle Renewable Energy Inc. - CEO & Director [42] -------------------------------------------------------------------------------- I'm just thinking. Q1 is a little bit biased because of what Andrea said is that some of the sawmills took extended shutdowns over the Christmas in the first couple of weeks and were slow coming back up. So that had an impact, particularly in Q1, which we don't see that in the other quarter. -------------------------------------------------------------------------------- Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [43] -------------------------------------------------------------------------------- Okay. And Andrea, could you just confirm the comments about leverage that you made, I believe you provided headline net debt to EBITDA. And also are you able to share with us the pro forma add backs that are being made to calculate covenant leverage? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [44] -------------------------------------------------------------------------------- So the majority of add backs that we have are related to the facilities that are under development, so Demopolis as well as High Level. And then also because Entwistle is back going through its commissioning curve, there's a gap between actual EBITDA and the pro forma EBITDA, as Rob said, we expect it to get to. So that's really the bulk of the add backs in terms of calculating that financial coverage leverage. Just -- there's certainly been a few questions about leverage, et cetera. And in addition to talking to our banks, we're taking a number of steps ourselves to ensure that we have sufficient liquidity and maintain compliance on both the leverage and fixed charge covenant ratio. We talked about reduction of some of the maintenance CapEx. We're also able to take advantage of some of the payment deferral programs that have been announced. For example, with BC Hydro, we're able to apply for and get some deferrals. We're working on government programs that help small and medium-sized businesses in both the U.S. and Canada that we clearly qualify for. And then, of course, the dividend cut that Rob talked about. -------------------------------------------------------------------------------- Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [45] -------------------------------------------------------------------------------- Okay. Just to confirm, Andy, I think you said leverage was 7.1 turns per your calculation at Q1 end, is that correct? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [46] -------------------------------------------------------------------------------- 7.7. -------------------------------------------------------------------------------- Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [47] -------------------------------------------------------------------------------- 7.7. Okay. And one last question. Just on Aliceville, do you have an estimate of EBITDA contribution, loss or profit in Q1? And where you would see normalized EBITDA from that facility going forward? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [48] -------------------------------------------------------------------------------- I'd say that we've talked about our run rate production and what we would achieve. And I think on our website in the investor presentation that we have, it shows that Aliceville produces annually. The run rate production would be approximately 300,000 tons per year. And it is producing within our range of CapEx to EBITDA. So you can do the math on what the annual amount would be. It has far less seasonality than some of our Northern BC or Northern Alberta plants. In Q1, as we talked about, it did have the shut to do with flooding event that occurred, so it certainly was lower. But we're seeing continued good year-over-year, quarter-over-quarter production increases out of the facility, that lead to a strong EBITDA margin. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- Your next question comes from Mark Jarvi from CIBC. -------------------------------------------------------------------------------- Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [50] -------------------------------------------------------------------------------- Maybe I'll just continue with Aliceville. Continuing on with Aliceville, in terms of -- any update on it in terms of time lines for some of those productivity enhancements? I think some of that was supposed to come in Q2. Is that still planned, and then that should drive some increased benefits in the back half of the year? -------------------------------------------------------------------------------- Robert McCurdy, Pinnacle Renewable Energy Inc. - CEO & Director [51] -------------------------------------------------------------------------------- So right now, we've -- as Andrea said, we went through and looked very carefully at the scope and CapEx spend. So we do have the next part phase and that's scheduled at the tail end of this quarter. And we expect that to help out that plant, both on additional production and productivity. -------------------------------------------------------------------------------- Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [52] -------------------------------------------------------------------------------- Okay. And then coming back to the third-party pellet sales. There's a bit of CapEx deferral here and some productivity enhancements that may have been deferred. So just wondering where you guys stand in terms of your offtake obligations for the balance of 2020 as you think about 2021, if you are short production and you'll be required to continue to access third-party pellets over the next couple of quarters? -------------------------------------------------------------------------------- Robert McCurdy, Pinnacle Renewable Energy Inc. - CEO & Director [53] -------------------------------------------------------------------------------- Right now, we've ran many scenarios. And between the good production rates in March and April and some of the things that Vaughan has done in the marketplace, we're well in balance, even taking in some various scenarios going forward. -------------------------------------------------------------------------------- Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [54] -------------------------------------------------------------------------------- So you think you can cover stand-alone this year and next year, at least based on what you're seeing right now? -------------------------------------------------------------------------------- Robert McCurdy, Pinnacle Renewable Energy Inc. - CEO & Director [55] -------------------------------------------------------------------------------- Certainly, this year and next year we're working on. -------------------------------------------------------------------------------- Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [56] -------------------------------------------------------------------------------- Okay. And that will require some customers to maybe shift around some of their offtake requirements. -------------------------------------------------------------------------------- Robert McCurdy, Pinnacle Renewable Energy Inc. - CEO & Director [57] -------------------------------------------------------------------------------- All those things are being worked on. -------------------------------------------------------------------------------- Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [58] -------------------------------------------------------------------------------- Okay. And then just kind of walk us through maybe where you guys are seeing the BC facilities, particularly the ones that require -- that have historically used a lot more sawmill residuals, so I'm thinking Smithers, Armstrong, Lavington, Houston. Are those all going to run at lower nameplate for the foreseeable future? Or can you guys get those facilities back up to mid-90s, high-90 nameplate capacity production levels? -------------------------------------------------------------------------------- Robert McCurdy, Pinnacle Renewable Energy Inc. - CEO & Director [59] -------------------------------------------------------------------------------- So Andrea is going to shoot me. But those plants, the entire fleet set a production record for an entire week in April. -------------------------------------------------------------------------------- Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [60] -------------------------------------------------------------------------------- Right. But I mean, that can be just favorable conditions, but I'm just wondering, as you see just ebbs and flows of sawmill curtailments coming back online and as you do the planning, your internal forecast, would you assume that those facilities can be close to nameplate for Q2 and Q3 when we're hitting more favorable weather? -------------------------------------------------------------------------------- Robert McCurdy, Pinnacle Renewable Energy Inc. - CEO & Director [61] -------------------------------------------------------------------------------- I would say each plant has its own story to it. There's a couple of plants that I'm worried about. And most of it's related to the tie-in of how much sawmill, the local sawmill will run. But the big sawmills look strong. There's a couple smaller -- the big pellet mills look strong. There's a couple of smaller pellet mills that we're doing a lot of work on. And really doing the risk versus the return on what rate to run those plants. -------------------------------------------------------------------------------- Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [62] -------------------------------------------------------------------------------- Okay. And maybe this question is for Andrea. I was just going to come back to the access and the delayed draw, and your comments sounds like you're really confident based on your conversation with lenders that you can continue to tap that. Was the dividend reduction a requirement from lenders to continue to fully access the delayed draw facility? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [63] -------------------------------------------------------------------------------- The dividend reduction was really -- came from management with our Board looking very proactively at how to make sure that we have sufficient covenant room in the future. And we took many steps, as I said, as well as really continuing to drive down our fiber costs and cash conversion costs and improve EBITDA. The -- we have not amended the credit agreement at this point in time. So there's nothing in the existing credit agreement that we triggered that required a dividend reduction. We just felt it was prudent, given the potential for risk and need for growth CapEx as we go forward. -------------------------------------------------------------------------------- Operator [64] -------------------------------------------------------------------------------- Your next question comes from Benoit Laprade from Scotiabank. -------------------------------------------------------------------------------- Benoit Laprade, Scotiabank Global Banking and Markets, Research Division - Director of Paper & Forest Products and Diversified Industries [65] -------------------------------------------------------------------------------- Just wanted to for a second to go back to the inventory situation, probably for you, Rob. You mentioned at the end of March, you had about 2.6 months, so almost a quarter of inventory ahead of the mill. Just curious to see, given all the curtailments we've heard about in late March, in April and some of it's continuing into May, how would you expect to finish this quarter? Or what is the situation as of today on the inventory front? -------------------------------------------------------------------------------- Robert McCurdy, Pinnacle Renewable Energy Inc. - CEO & Director [66] -------------------------------------------------------------------------------- So the way we see it right now, and it's really coupled with the information we get from the sawmills of that situation stabilizing, I would say that our inventory trend would be slightly down as per our plan. -------------------------------------------------------------------------------- Benoit Laprade, Scotiabank Global Banking and Markets, Research Division - Director of Paper & Forest Products and Diversified Industries [67] -------------------------------------------------------------------------------- And your plan would call to keep approximately how much excess -- well, strategic inventory ahead of the plan going forward, given the fluid situation in BC? -------------------------------------------------------------------------------- Robert McCurdy, Pinnacle Renewable Energy Inc. - CEO & Director [68] -------------------------------------------------------------------------------- So it's higher than what we had in the budget because of the fluid situation due to COVID in BC. We always had a profile on this inventory that was more driven by spring breakup than anything else. And so we had it building up during the spring breakup period. And then diminishing over the rest of the year and then building up in the winter time again and prep for the following spring breakup was the profile that we had envisioned. Right now it's higher, as we said, and that increase is really driven off the uncertainty of COVID. -------------------------------------------------------------------------------- Benoit Laprade, Scotiabank Global Banking and Markets, Research Division - Director of Paper & Forest Products and Diversified Industries [69] -------------------------------------------------------------------------------- Okay. Second, just curious, is there any production or shipments guidance that you're willing to share either for the -- this coming quarter or for the year as a whole? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [70] -------------------------------------------------------------------------------- We haven't prepared guidance at this time. It's just such a fluid situation that we haven't done that. But I would say that the key variables for 2020, if you compare it to 2019 volumes, is certainly Entwistle will be the real difference. And Aliceville is performing very well. And we talked lots about the BC mills and their production levels there a bit more. We do have High Level coming on at in Q4, so it will add some, but I'm -- Q4 is a cold month in very Northern Alberta. So I remain modest in my expectations as to the significance of what it would add to the revenue line. -------------------------------------------------------------------------------- Benoit Laprade, Scotiabank Global Banking and Markets, Research Division - Director of Paper & Forest Products and Diversified Industries [71] -------------------------------------------------------------------------------- Okay. And last one for me, and I don't want to, I guess, beat the dead horse. But I guess, triangulating between the discussions potentially with the bank, the covenant room and also the dividend reduction, in a context where many companies actually have taken the opportunity to suspend the dividend altogether for obvious reasons, just curious how you came to that 75% reduction and not 100% given the fact that you may have to ask for covenant relaxation? And/or why not tie it to the process? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [72] -------------------------------------------------------------------------------- Yes. We certainly -- as you can imagine, Benoit, we took counsel from a lot of our advisers. We had the benefit of seeing the experience of many other companies and seeing what action they took. And frankly, it was a real mix of suspension versus reduction. Because Pinnacle's end market and revenue basis is solid, and it's really margin that is at risk with COVID-19, we determined that we could still pay shareholders a modest dividend without putting our covenants at significant risk. -------------------------------------------------------------------------------- Benoit Laprade, Scotiabank Global Banking and Markets, Research Division - Director of Paper & Forest Products and Diversified Industries [73] -------------------------------------------------------------------------------- I want to say congrats on getting Mr. Davies on the Board. -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [74] -------------------------------------------------------------------------------- Thank you. We're very pleased to have him. -------------------------------------------------------------------------------- Operator [75] -------------------------------------------------------------------------------- Your next question comes from Ian Gillies from Stifel. -------------------------------------------------------------------------------- Ian Brooks Gillies, Stifel GMP Research - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [76] -------------------------------------------------------------------------------- Going back to gross margins, I mean, there's obviously a lot of pushes and pulls right now impacting it. But as we think perhaps even over the medium to long term, is it a better long-range goal now given all that's transpired in that mid- to high teens percent from a gross margin perspective rather than maybe the low 20s that was achieved in 2018. -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [77] -------------------------------------------------------------------------------- As I look forward, certainly 2019 and even 2018 were impacted by us bringing on new facilities. So if you were to look at adjusted gross margin in a year with no new facilities ramping up and having full operating leverage, certainly with the BC mills, we would see reduced margin compared to historical levels. But with the development that we're doing in Demopolis, High Level, we'll have over 44% of our production outside of the BC fiber basket that will still be almost exclusively sawmill residuals. And we'll get better with our harvest residual processing and costs over time in BC as well. -------------------------------------------------------------------------------- Ian Brooks Gillies, Stifel GMP Research - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [78] -------------------------------------------------------------------------------- Okay. With respect to 2020 gross CapEx and maintenance CapEx, are you able to provide some goalpost for what those numbers may be? Or would you just prefer we continue to try and back into it based on some of the potential delays? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [79] -------------------------------------------------------------------------------- I think, certainly, it looked like most of you had a good handle on the total CapEx expenditures for 2020 prior to us announcing delay in deferral and some of their projects. They are somewhat modest. So we still have strong needs for growth CapEx with the 2 big projects. -------------------------------------------------------------------------------- Ian Brooks Gillies, Stifel GMP Research - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [80] -------------------------------------------------------------------------------- With respect to the balance sheet, has there been much consideration? Or is there much appetite right now to perhaps selling some minority interest in some of the plants that may not have a partner right now in an effort to reduce indebtedness? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [81] -------------------------------------------------------------------------------- So there's a couple of things we look at when we have partners in our pellet facilities. And we're very pleased and even more so in times like this with COVID to have sawmill partners like Tolko, West Fraser, Canfor, Westervelt and now Two Rivers as well down in Alabama because they do help us ensure a good supply of fiber for our plants. So that's the main partnership we look for. And we're often in discussions because those sawmill partners in order to continue their production, to continue their expansion, to maybe replace some offtake that they have to pulp mills that may no longer be operating at the same levels, we explore those, and that could well be a way that works for both of us from a strategic level and does help reduce CapEx. -------------------------------------------------------------------------------- Ian Brooks Gillies, Stifel GMP Research - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [82] -------------------------------------------------------------------------------- Last one from me. With the onset of COVID-19, I'm just curious if that's pushed any of the time lines around the CEO search? And when you expect that to be completed? -------------------------------------------------------------------------------- Robert McCurdy, Pinnacle Renewable Energy Inc. - CEO & Director [83] -------------------------------------------------------------------------------- Yes, it did push back. And what we had announced, it still holds us is that I've delayed my retirement until the end of October. And that's just to allow the Board to continue their search under COVID conditions. -------------------------------------------------------------------------------- Operator [84] -------------------------------------------------------------------------------- Your next question comes from David Newman with Desjardins. -------------------------------------------------------------------------------- David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [85] -------------------------------------------------------------------------------- I just want to -- a couple of quick follow-ups, if I could. Is there a force majeure provisions in your covenants at all such that COVID will not affect the calculations? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [86] -------------------------------------------------------------------------------- So in terms of COVID-19 and credit agreements, yes, certainly lots of credit agreements do have clauses in them about extraordinary events and do allow add back. But I think insurers and bankers the world round are trying to come to grips with how these impacts may speak to the contracts. And we've incurred additional costs. We're making sure and keeping our employees safe and our facilities operating. So we have face masks, temperature sensing and extra PPE equipment that we didn't have previously. Mercifully, we do not have lost revenue, like some of the retailers do right now. So I don't think we're coming close to testing those COVID-19 impacts that lenders are seeing with other clients. -------------------------------------------------------------------------------- David Francis Newman, Desjardins Securities Inc., Research Division - Analyst [87] -------------------------------------------------------------------------------- Okay. And then just a quick one. I know we talked about CapEx quite a bit, but how about OpEx? I mean, obviously, as you point out, the top line is pretty safe. But is there spending -- nonessential spending or an SG&A costs and things like that, that you've considered and/or have factored into the outlook? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [88] -------------------------------------------------------------------------------- Absolutely. And certainly within our facilities and our operations team is where the majority of expenditure happens. And there's a number of initiatives that are underway that reduce costs or improve productivity within the SG&A realm. And there's very little travel going on, David, as you can imagine. But we are prudently looking at all of our expenditures and working with our suppliers to make sure that we're able to preserve as much cash as possible. -------------------------------------------------------------------------------- Operator [89] -------------------------------------------------------------------------------- Your next question comes from Mark Jarvi from CIBC. -------------------------------------------------------------------------------- Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [90] -------------------------------------------------------------------------------- I just wanted to have a quick follow-up here on fiber costs. And the mix has changed a lot, and there's a lot of factors going on. But when you think about the cost of procuring and then the fiber breakdown costs for harvest residuals, have they come in line with your expectations? Or what have you guys learned over the last couple of quarters as you started to adopt more these harvest residuals? -------------------------------------------------------------------------------- Robert McCurdy, Pinnacle Renewable Energy Inc. - CEO & Director [91] -------------------------------------------------------------------------------- So I think we've made lots and lots of progress. And it's exactly what I said is now we understand and have developed tools that it's not only the acquisition cost of the material, it's also the quality of the material, the cost it takes to get to the plant and also the cost to treat it. So what's the impact? So we say, what's the cost all the way through to the pelleters. And that allows us to take in the constraint to the plant, whether it may be drawing capacity or breakdown capacity and also factor those in. So we have a much more robust ability to choose fiber, get the right fiber to the plant and understand the impact that would have on our costs. -------------------------------------------------------------------------------- Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [92] -------------------------------------------------------------------------------- I guess, more specific, I'm just wondering, if you think back 6, 9 months ago when you started to pivot using more of this, where have the costs come in for using these harvest residuals versus what you initially thought they would cost you? -------------------------------------------------------------------------------- Robert McCurdy, Pinnacle Renewable Energy Inc. - CEO & Director [93] -------------------------------------------------------------------------------- Well, in it -- back in Q3 when we're reacting to them, the costs are higher than we expected. Now what we see is now that we have much better planning tools and able to understand better that we have a handle on that. The piece that we do, and we did a lot of scenario planning when COVID first hit was what's the degree to each plant and the impact on each plant under different scenarios of fiber mix into it. -------------------------------------------------------------------------------- Operator [94] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from Nelson Ng from RBC Capital Markets. -------------------------------------------------------------------------------- Nelson Ng, RBC Capital Markets, Research Division - Analyst [95] -------------------------------------------------------------------------------- Just a quick follow-up on gross margins. So I think Andrea mentioned earlier that, I don't know if I heard right, but the second half -- the gross margins on the second half of this year may look similar to the second half of last year. Is that what you indicated earlier? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [96] -------------------------------------------------------------------------------- It's hard to do direct comparability, but we would expect them to continue to see the same seasonal pattern of improvement that we saw between Q1 2019 and Q2 to Q4 in 2019. There's going to be different factors at play. Certainly, throughout most of 2019, we had Entwistle that was producing with its dry side only and still had its fixed overhead costs. So we'll have nice operating leverage improvement on that facility. And then we will have the impact of High Level coming up with small production volume and its fixed overhead costs into Q4, that will have some impact on that quarter. -------------------------------------------------------------------------------- Nelson Ng, RBC Capital Markets, Research Division - Analyst [97] -------------------------------------------------------------------------------- Okay. And then for -- in terms of Q1 2020, from like an absolute and seasonal perspective, does this look like the trough -- like does it look like margins have troughed in Q1, given all the negative factors that fed into Q1? -------------------------------------------------------------------------------- Andrea Louise Johnston, Pinnacle Renewable Energy Inc. - CFO [98] -------------------------------------------------------------------------------- I think the significant impact of CN on the cost of inventory that we held over from Q4 and then the January and February significant impacts of both the flooding and CN blockades and port demurrage, et cetera, and the impact on quality that we had from that, it certainly was a very impacted quarter. I'd like to believe it will be the trough. We are in a period of COVID-19, and I didn't expect to be here today either. -------------------------------------------------------------------------------- Nelson Ng, RBC Capital Markets, Research Division - Analyst [99] -------------------------------------------------------------------------------- Okay. Got it. And then just one last question. Given that you guys are looking to preserve capital, is it safe to assume that you're putting a hold on any new pellet production growth prospects until your balance sheet improves? And also, are you -- like are you also putting a hold on pursuing new sales contracts with potential offtakes? -------------------------------------------------------------------------------- Robert McCurdy, Pinnacle Renewable Energy Inc. - CEO & Director [100] -------------------------------------------------------------------------------- So what we've done because of the uncertainty of COVID is that we have any new business development, we've been limiting or cutting off any capital spend on that development. We are doing still some paper and computer modeling on those just to keep them alive. The other one, on long-term contracts, we continue to talk to people. The market continues to grow. And we will look at any contract and -- but carefully that -- with matching up with production as we always do. -------------------------------------------------------------------------------- Operator [101] -------------------------------------------------------------------------------- So Mr. Rob McCurdy, there are no further questions at this time, so please proceed. -------------------------------------------------------------------------------- Robert McCurdy, Pinnacle Renewable Energy Inc. - CEO & Director [102] -------------------------------------------------------------------------------- So thank you for the questions, and thanks for joining the call, and I'll end it here. Thanks. -------------------------------------------------------------------------------- Operator [103] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes our conference call for today. We thank you for participating, and ask that you please disconnect your lines.