Canexus Announces 2015 First Quarter Results

CALGARY, AB--(Marketwired - May 06, 2015) - Canexus Corporation (TSX: CUS) (the "Corporation" or "Canexus") today announced its financial results for the first quarter ended March 31, 2015.

Highlights:

• Cash Operating Profit ("COP") was $26.9 million for the quarter ended March 31, 2015 (Q4/14 - $20.7 million; Q1/14 - $22.2 million). Our Q1/15 results reflect the benefit of the weaker Canadian dollar on both our North American Sodium Chlorate and Brazil business units; improved North American Chlor-alkali metric electrochemical unit ("MECU") production and sales volume over the prior quarter, offset by reduced hydrochloric acid ("HCl") sales volume; and a cash operating loss at our North American Terminal Operations ("NATO") due to the continued ramp up of unit train operations, somewhat lower manifest transload volumes as compared to the prior quarter (including both assembled unit trains and manifest cars) and severance costs incurred to reduce the workforce at NATO. COP for the quarter was negatively affected by $2.7 million of severance costs incurred with the commencement of the Business Improvement Program ("BIP") discussed further below.
• As announced previously, Canexus initiated the organizational right-sizing that was outlined in our BIP, with a significant reduction in Calgary head office and NATO staff. The ongoing benefits will start to be realized in Q2/15. This program is expected to improve COP by $10 million to $15 million annually from cost reduction and improved plant uptime. The full benefit is expected to be realized in 2016 and future years. Additionally, we plan to lower our investment in normalized working capital by not less than $10 million by the end of 2015 and to contain maintenance capital spending in future years to not more than $25 million (running average over a three year period) while improving operating reliability and manufacturing conversion efficiency.
• The Corporation continues to hold discussions with North American parties regarding the potential sale of NATO and our North American Chlor-alkali business at North Vancouver. Given current industry and market conditions, the estimated realizable value of NATO, based on recent expressions of interest, is substantially below recent research analyst estimates. There is no assurance that a transaction for either or both of these assets, if pursued, will be concluded.
• Canexus' North American Sodium Chlorate business posted solid performance in the first quarter. COP was $16.6 million (Q4/14 - $13.8 million; Q1/14 - $15.2 million) despite lower production at our industry-leading, low-cost Brandon plant. The failure of a copper buss bar resulted in the loss of about 2,700 metric tonnes ("MT") of production. The plant returned to normal operating rates in March. This business unit is currently benefiting from the devaluation of the Canadian dollar relative to the US dollar, with approximately two-thirds of our sales volume exported to the US. North American sodium chlorate industry operating rates are expected to remain in the low 90% range in 2015, assuming no capacity rationalization.
• Canexus' North American Chlor-alkali business generated $8.1 million in COP for the quarter (Q4/14 - $7.4 million; Q1/14 - $5.3 million). MECU production volumes increased over the prior quarter as we continue to recoat the anodes in the electrolytic cells (4 of 7 electrolytic cells have been recoated to date). The plant is currently operating at approximately 84% of practical capacity and we expect to be able to return to full operating rates in Q3/15. As expected, HCl sales volume and prices declined significantly through the first quarter. We estimate that demand from the oil and gas sector is down about 35%. There is a significant backlog of drilled but uncompleted wells that could result in a rapid increase in HCl demand should oil prices improve later in the year. Price increase settlements for Q2/15 for chlorine and caustic soda ranged from $20/MT to $50/MT as contracts allowed. The caustic modernization project at North Vancouver is expected to be completed on schedule in October and is currently tracking below budget.
• Canexus' Brazil operations generated COP of $7.0 million in the quarter (Q4/14 - $6.0 million; Q1/14 - $7.6 million). Brazil's operations continue to be highly stable with our primary customer running at high rates resulting in strong demand for our products which are sold under a long-term, cost plus, fixed US dollar margin contract. 
•  At the NATO unit train facility, Canexus loaded 46 unit trains in the quarter (Q4/14 - 31 unit trains) and set a monthly record of 17 unit trains in March. March results included 4 unit trains on a spot basis. In conjunction with the BIP initiative, we are actively looking to further reduce our cost structure and are exploring options to increase unit train activity levels. At the currently contracted level commencing Q3/15 of 5.5 unit trains per week (assuming full nominations), this facility should break even or be slightly positive from a COP perspective. As announced previously, full nominations were not received for Q2/15 and Canexus is currently pursuing spot contract opportunities. One unit train was contracted on a spot basis in April.
• During the first quarter, the NATO manifest (truck-to-rail) operation loaded and assembled 11 unit trains for customers (Q4/14 - 7 unit trains) and is scheduled to load and assemble 12 unit trains in Q2/15. Operating rates for dilbit and crude oil ("DBCO") transloading continue to be about one-third of our capacity of 30,000 bbls/day (including both assembled unit trains and manifest cars). The reductions in NATO staff mentioned above better align our workforce with activity levels across the entire NATO site and we continue to pursue further cost reduction opportunities. Also, we expect to see higher transload volumes for butane with a new one year take-or-pay contract that commenced in April.
• The Board of Directors declared a quarterly dividend of $0.01 per common share payable July 15, 2015 to shareholders of record on June 30, 2015.

"I am pleased with first quarter financial results and the progress being made on our Business Improvement Program", commented Doug Wonnacott, President and CEO. "Energy market conditions are likely to continue to challenge business performance at NATO and in our North America Chlor-alkali business unit, and I expect weaker second quarter results. Given this environment, the success and timing of a disposition of NATO or our North American Chlor-alkali business is uncertain. We will continue to focus on what we can reasonably control to reduce debt, improve business performance and leverage our impressive portfolio of chemical assets to move Canexus forward."

Below is a reconciliation of net cash generated from (used in) operating activities to Distributable Cash of the Corporation for the three months ended March 31, 2015 and 2014.

Segmented Information for the Three Months Ended March 31, 2015 and 2014

Canexus has a total of six electrochemical manufacturing plants - four in Canada and two at one site in Brazil - organized into three business units. Canexus also provides fee-for-service hydrocarbon transloading at its NATO terminal in Bruderheim, Alberta as a separate business unit. Below is our first quarter performance by segment.

Highlights for each business unit are as follows:

• North America Sodium Chlorate:
• Q1 2015 versus Q4 2014: Sales revenue for the North America sodium chlorate segment increased 4% as a result of higher delivered prices (5%) offset by slightly lower sales volumes (2%). The weakening of the Canadian dollar (Q1 2015 - US $0.83 as compared to US $0.90 for Q4 2014) contributed to higher realized delivered prices. Cash Operating Profit Percentage increased from 23% to 26% as a result of higher realized netback prices (4%) and lower fixed costs, partially offset by lower production volumes from our low-cost Brandon plant. Fixed costs for Q4 2014 included $1.3 million related to the write-down of materials and supplies inventory with no comparable write-downs occurring in Q1 2015. 
• Q1 2015 versus Q1 2014: Sales revenue increased 6% in Q1 2015 as compared to Q1 2014. The weakening of the Canadian dollar (Q1 2015 - US $0.83 as compared to US $0.92 for Q1 2014) contributed to increased realized delivered prices (7%) which were offset by slightly lower sales volumes (1%). Cash Operating Profit Percentage remained consistent at 26% with higher realized netback prices (7%) offset by lower production volumes (5%) primarily at our low-cost Brandon plant, higher general and administrative costs allocated to this business and slightly higher fixed costs. 
• North America Chlor-alkali:
• Q1 2015 versus Q4 2014: Sales revenue for the North America chlor-alkali segment declined 2% due to lower HCl sales volumes (13%) more than offsetting higher chlorine and caustic soda sales volumes (39% and 3%, respectively) and higher chlorine delivered prices (18%). The decline in HCl sales volumes related primarily to the Canadian market and was associated with lower demand from the oil and gas sector as commodity prices continued to be under pressure, resulting in reduced drilling and hydraulic fracturing activity. Cash Operating Profit Percentage increased from 14% to 16% as a result of higher MECU production volumes (8%), lower purchased product costs and lower fixed costs more than offsetting lower MECU realized netbacks (6%) and higher general and administrative costs allocated to this business. 
• Q1 2015 versus Q1 2014: Sales revenue for the North America chlor-alkali segment increased 3% due to higher HCl and chlorine delivered prices (23% and 27% respectively) being offset by lower HCl and chlorine sales volumes (26% and 13%, respectively). Cash Operating Profit Percentage increased from 10% to 16% as a result of higher MECU realized netback prices (9%) and lower non-electricity energy and fixed costs being partially offset by lower MECU production volumes (8%) and higher general and administrative costs allocated to this business. 
• South America:
• Q1 2015 versus Q4 2014: Sales revenue for the South America segment increased 18% primarily due to higher sales volumes (sodium chlorate - 6% and sodium hypochlorite - 4%) and higher realized delivered prices (sodium chlorate - 30%, caustic soda - 8% and chlorine - 4%) more than offsetting lower chlorine, caustic soda and HCl sales volumes (12%, 5% and 5%, respectively). Realized delivered prices under our US dollar fixed margin contract benefited from the weaker Canadian dollar in Q1. Cash Operating Profit Percentage remained consistent at 28% as a result of lower production volumes, higher purchased product costs and higher salt costs being offset by lower fixed costs and the benefit of the weaker Canadian dollar on our US dollar fixed margin sales. Production volumes in Q1 2015 were negatively impacted by maintenance shutdowns at both the Corporation's chlor-alkali facility and our major customer's production facility. 
• Q1 2015 versus Q1 2014: Sales revenue for the South America segment increased 8% due to higher realized delivered prices (sodium chlorate - 15%, chlorine - 9% and caustic soda - 2%) more than offsetting lower sales volumes (chlorine - 17%, sodium chlorate - 5% and HCl - 5%). Cash Operating Profit Percentage decreased to 28% from 32% as a result of higher fixed costs, lower production volumes and higher purchased product costs, more than offsetting the benefit of the weaker Canadian dollar on our US dollar fixed margin sales.
• North American Terminal Operations:
• Q1 2015 versus Q4 2014: Cash Operating Loss for Q1 2015 was $2 million, inclusive of transloading services of $0.5 million for inter-segment chlor-alkali products, as compared to $2.5 million, inclusive of transloading services of $0.6 million for inter-segment chlor-alkali products, for Q4 2014. External sales revenue increased 28% as a result of higher unit train throughput volumes (63%) related to improved loading times following the completion of commissioning activities associated with the capacity expansion and tie in to the Cold Lake pipeline system in September 2014 and resulting ability to service full contractual volumes plus spot demand. Cash cost of sales (cost of sales before depreciation and amortization included in cost of sales) comprise fixed costs including employee costs, pipeline fixed fee and operating costs and other costs of operating the Bruderheim Terminal. The increase in cash cost of sales was primarily due to higher property tax estimates ($0.6 million), higher pipeline operating costs ($0.2 million) and higher employee costs ($0.4 million) including one-time costs associated with the implementation of the BIP. 
• Q1 2015 versus Q1 2014: Cash Operating Loss for Q1 2015 was $2 million, inclusive of transloading services of $0.5 million for inter-segment chlor-alkali products, as compared to COP of $0.7 million, inclusive of transloading services of $0.6 million for inter-segment chlor-alkali products, for Q1 2014. External sales revenue increased 37% for the same period as a result of the higher unit train throughput volumes (140%) following the completion of the capacity expansion and tie in to the Cold Lake pipeline system in September 2014. Completion of commissioning activities, improved loading times and spot market demand in Q1 2015 further increased unit train throughput volumes. The increase in cash cost of sales was primarily due to the completion of the pipeline lateral off the Cold Lake pipeline system from Beaverhill Station to Lamont Station in July 2014, higher employee costs including one-time costs associated the implementation of the BIP and higher property taxes. Upon completion of the pipeline lateral noted above, the Corporation became responsible for the pipeline fixed fee and other costs associated with the connection. 

General Market Fundamentals

North America Sodium Chlorate: For Q1 2015, global pulp shipments have increased by over 6% as compared to Q1 2014. Most of the increase was driven by demand for hardwood pulp, while China remains the region with the highest demand growth. Combined producer inventory levels have declined steadily from their peak in January of 40 days to their current level of 36 days. Softwood inventory stands at 33 days slightly, above historical averages, whereas hardwood inventory is at 38 days. Combined inventory levels are expected to decline further over the next quarter as major producing regions enter their annual maintenance season.

The North American demand for sodium chlorate was strong in Q1 2015 benefiting from the restart of a recently idled pulp mill in the North Eastern United States. Sodium chlorate exports from North America for the first two months of the year were slightly above prior year levels and operating rates for the industry were slightly higher than the previous quarter, but remained in the low 90% range, where they are expected to remain through 2015.

North America Chlor-alkali: Consistent with Q4 2014, the North American chlor-alkali industry continued to operate at 80% of capacity in Q1 2015. As expected, based on historical results, chlorine demand was impacted by lower consumption from the vinyls segment and seasonal factors in the water treatment segment. Caustic soda production and demand in Q1 was consistent with Q4.

HCl supply increased in Q1 2015 due to higher operating rates of by product producers and chlorine availability for burner producers. At the same time, HCl demand declined significantly due to lower drilling and hydraulic fracturing activity in the oil and gas industry as a result of lower oil and gas commodity prices.

Pricing on a MECU basis (before the impact of HCl) remained stable in Q1 2015 and is expected to increase in Q2 2015 due to improving chlorine and caustic prices. HCl prices declined in Q1 2015 due to the weak supply/demand fundamentals outlined above.

South America: During Q1 2015, Brazilian pulp production and exports increased by 7% and 19.9%, respectively, compared to Q1 2014. 

Sodium chlorate demand from Canexus Brazil's major customer was slightly lower in Q1 than expected. The Brazilian chlor-alkali capacity utilization rate was at 84% in Q1 2015; 2.7% lower than Q1 2014. Canexus Brazil's chlor-alkali capacity utilization was 92% for Q1 2015.

Oil & Gas: Market conditions for heavy oil remained unfavorable in Q1 2015 due to the continued weakness in West Texas Intermediate ("WTI") pricing. The differential between Western Canadian Select ("WCS") and WTI averaged US$14.74/bbl in the first quarter as compared to US$14.24/bbl in Q4 2014.

Oil prices and differentials are expected to remain challenging for the remainder of 2015 and are expected to have a negative impact on crude by rail volumes. This is, however, expected to be partially offset by delays related to pipeline capacity improvements and expansion projects.

Financial Updates

• Long-term Debt and Finance Expense:
• Canexus has US dollar borrowings and a substantial portion of our revenues are denominated in or referenced to the US dollar. During Q1/15, we recorded an unrealized currency translation loss of $24.3 million on long-term debt as a result of the weaker Canadian dollar at the end of the quarter compared to the end of Q4/14 (Q1/14 - $4.2 million unrealized loss). In Q1/14, $9.4 million of realized foreign currency translation losses (Q1/15 - $nil) were recognized on repayment of US dollar borrowings. These amounts are included in finance income (expense).
• Interest expense in the quarter was $7.4 million (Q1/14 - $2 million). Interest capitalized on major projects was $0.1 million in Q1/15 (Q1/14 - $2.7 million).
• Other Income (Expense):
• In Q1/15, mark-to-market fair value gains of $0.7 million (Q1/14 - mark-to-market fair value losses of $0.6 million) and realized losses of $1.8 million (Q1/14 - $0.5 million) were recorded on average rate range forward contracts.
• In Q1/15, we recorded mark-to-market fair value losses on a cross currency swap of $1.4 million as a result of the weaker Canadian dollar at the end of the quarter compared to the end of Q4/14 (Q1/14 - $0.6 million) and realized losses of $0.2 million (Q1/14 - $0.1 million). In Q3/11, we entered into a cross currency swap to effect the payment of interest in US dollars on the Series IV Convertible Debentures issued on June 30, 2011.
• General and Administrative: General and administrative expenses were lower for Q1/15 as compared to Q1/14 primarily as a result of higher severance costs in Q1/14.
• Capital Expenditures: Capital expenditures in Q1/15 were $13.4 million, of which $3.4 million was spent on expansion projects, $4.6 million on maintenance projects and $5.4 million on continuous improvement projects. Expansion capital was primarily spent on the NATO unit train project and continuous improvement capital on the caustic modernization project underway at our North Vancouver chlor-alkali facility.
• Provision for (Recovery of) Income Taxes: The deferred tax recovery in Q1/15 resulted from book depreciation exceeding tax depreciation. As of March 31, 2015, the Corporation had approximately $875.6 million of future tax deductions which can be used to shelter future taxable income in Canada.
• Liquidity: At March 31, 2015, total borrowings under committed credit facilities were $356 million with remaining available undrawn capacity of approximately $104 million. Cash on hand at March 31, 2015 was $6.8 million.

Financial Statements, Conference Call and Webcast
Financial Statements and Management's Discussion and Analysis ("MD&A") will be posted on the Canexus website at www.canexus.ca and filed on SEDAR. Management will host a conference call and webcast at 7 am MT (9 am ET) on May 7, 2015, to discuss the financial and operating results of the Corporation. A presentation will be available on our website to facilitate the conference call. Please call 1-416-340-8530 or 1-800-446-4472 outside of Canada and the USA. The conference call will also be accessible via webcast at www.canexus.ca or by following the link http://www.gowebcasting.com/6468. A replay of the conference call will be available until end of day ET on May 14, 2015. To access the replay call 1-800-408-3053 or 1-905-694-9451, outside of Canada and the USA, followed by passcode 2940143#.

Non-GAAP Measures
Cash operating profit, cash operating profit percentage, payout ratio, cash payout ratio and distributable cash are financial measures not determined in accordance with generally accepted accounting principles for publicly accountable enterprises in Canada ("GAAP"), but management believes they are useful in measuring the Corporation's performance. Readers are cautioned that these measures should not be construed as alternatives to net income or loss or other comparable measures determined in accordance with GAAP as an indicator of the Corporation's performance or as a measure of the Corporation's liquidity and cash flow. The Corporation's method of calculating non-GAAP measures may differ from the methods used by other issuers and accordingly, the Corporation's non-GAAP measures are unlikely to be comparable to similarly titled measures used by other issuers. Readers should consult the Corporation's MD&A for the three months ended March 31, 2015 filed on SEDAR for a complete explanation of how the Corporation calculates each such non-GAAP measure.

Forward-Looking Statements
This news release contains forward-looking statements and information relating to expected future events and financial and operating results of the Corporation and its subsidiaries, including with respect to: the impact of BIP on improved COP and the timing thereof; reductions in investment in normalized working capital and the containment of maintenance capital spending and the timing thereof; improvements in operating reliability and manufacturing conversion efficiency; North American sodium chlorate operating rates in 2015; North American sodium chlorate capacity rationalization; full operating rates for North American chlor-alkali and the timing thereof; HCl demand; price increases for chlorine and caustic soda; the timing and cost of completion of the caustic modernization project at North Vancouver; NATO activity levels and the impact on COP; transload volumes for butane; organizational right-sizing; energy market conditions and the impact on NATO, North American chlor-alkali and crude by rail volumes; the potential sale of NATO and our chlor-alkali business at North Vancouver, including the estimated realizable value of NATO; softwood inventory levels and sodium chlorate exports from North America. The use of the words "expects", "anticipates", "continue", "estimates", "projects", "should", "believe", "plans", "intends", "may", "will" or similar expressions are intended to identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those anticipated in such forward-looking statements for a variety of reasons, including market and general economic conditions, future costs, treatment under governmental regulatory, tax and environmental regimes and the other risks and uncertainties detailed under "Risk Factors" in the Corporation's Annual Information Form filed on the Corporation's SEDAR profile at www.sedar.com. Management believes the expectations reflected in these forward-looking statements are currently reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements should not be unduly relied upon. Due to the potential impact of these factors, the Corporation disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. Any financial outlook information contained in this news release about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on Management's assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this news release should not be used for purposes other than those for which it is disclosed herein.

About Canexus
Canexus produces sodium chlorate and chlor-alkali products largely for the pulp and paper and water treatment industries. Our four plants in Canada and two at one site in Brazil are reliable, low-cost, strategically located facilities that capitalize on competitive electricity costs and transportation infrastructure to minimize production and delivery costs. Canexus also provides fee-for-service hydrocarbon transloading services to the oil and gas industry from its terminal at Bruderheim, Alberta. Canexus targets opportunities to maximize shareholder returns and delivers high-quality products to its customers and is committed to Responsible Care^® through safe operating practices. Canexus' common shares (CUS) and debentures (Series III - CUS.DB.A; Series IV - CUS.DB.B; Series V - CUS.DB.C; Series VI - CUS.DB.D) trade on the Toronto Stock Exchange. More information about Canexus is available at www.canexus.ca.