Canexus Income Fund
TSX : CUS.UN

Canexus Income Fund

October 22, 2008 17:12 ET

Canexus Income Fund Announces Third Quarter Results

Excellent Results Significantly Increase Distributable Cash

CALGARY, ALBERTA--(Marketwire - Oct. 22, 2008) - Canexus Income Fund (TSX:CUS.UN) (the "Fund") today announced its results for the third quarter ended September 30, 2008. Unless otherwise noted, the Fund is reporting the 100 percent results of Canexus Limited Partnership (Canexus LP), of which the Fund indirectly owns 37.3 percent.

Highlights:

- Distributable cash for the third quarter up 17 percent from the same period last year to $24.8 million; Fund declared $4.4 million in cash distributions for a payout ratio of 48 percent (50 percent normalized for the timing of maintenance capital spending)

- The company improved its guidance for the year to reflect a payout ratio of 60 to 65 percent from the prior level of 75 to 80 percent, as a result of continued strong demand and pricing for its products and the weakening in the Canadian dollar

- Canexus saw modest benefits from a decrease in the value of the Canadian dollar against the US dollar during the quarter; benefits should be more significant in the fourth quarter as the Canadian dollar has continued to weaken significantly. The impact of the Canadian dollar weakening from parity to current levels (October 21 close US$0.8239) would add approximately $30 million of cash flow to our business annually

- Significant caustic soda price increases announced for the fourth quarter will contribute to continued strong performance

- North Vancouver chlor-alkali plant currently operating at capacity and above industry operating rates; our technology conversion project (TCP) at this plant is progressing on time and on budget with committed financing in place through August 2011. At September 30, our long-term debt is $249 million leaving an additional $250 million of committed credit available

- North American sodium chlorate sales revenues for the third quarter increased 20 percent from same period last year due to strong demand from US customers and price increases; Brandon sodium chlorate plant expansion performing above design capacity further enhancing margins

- South American sales revenue increased 44 percent from same period last year with sodium chlorate and chlor-alkali volumes increasing by 17 and 8 percent respectively; in addition to the 2,000 MT sodium chlorate expansion that will be completed in January 2009, the Board approved a further 4,400 MT expansion that will start-up in the first quarter of 2010 at a cost of US$5 million. In the third quarter a new US$10 million extendible revolving credit facility was closed with Export Development Canada to fund capital expenditures in Brazil.

"Canexus had an exceptional third quarter with strong performance from each of our three business units. We continue to see good supply-demand fundamentals and are starting to benefit from a weaker Canadian dollar," said Gary Kubera, President and CEO. "Our past investments to develop a low-cost position allow us to have confidence in our business and to advance our strategy even in turbulent market conditions. Sodium chlorate 2009 contract settlements continue to indicate price momentum and we have announced significant caustic soda price increases for the fourth quarter."

"Our North Vancouver chlor-alkali facility is currently operating at full rates and is expected to continue at high rates into November. During the third quarter, North Vancouver operated at above average rates compared to the rest of North America, as manufacturers in the US gulf coast were impacted by Hurricane Ike. We expect rates to decrease slightly in the fourth quarter due to the traditional slowdown in the water treating season, but significant strength in caustic soda prices is expected to result in higher MECU prices."

"The Technology Conversion Project (TCP) at North Vancouver has fully committed financing and remains on time and on budget for start-up in the first quarter of 2010. Approximately $111 million of the $208 million budget is committed to date. This project is expected to substantially enhance our competitive strength in the chlor-alkali business, generating an estimated $35 to $43 million of incremental annual cash flow ($45 to $53 million at current price levels) primarily from significant cost savings. The hydrochloric acid project approved last quarter is also on track."

"The North American sodium chlorate market remains solid and the industry operated at near full economic capacity during the third quarter. Our recently expanded Brandon plant continues to exceed expectations with volume and pricing higher than projected. Demand from North American pulp customers and exports remains steady and we believe that rising electricity prices in the US south east may be eroding economic chlorate capacity."

"In South America, we are systematically growing our business and results remain strong. Our operation in Brazil is highly stable and is performing exceptionally well. Projected pulp growth in Brazil supports further significant growth opportunities in this business unit and our most recent capacity expansion announced today demonstrates our ability to grow our well-established advantages."

"Despite financial market volatility, Canexus remains committed to our growth strategy and enhancing our low-cost competitive position. Our low-cost position and a weaker Canadian dollar contribute to our ability to deliver excellent results. We have improved our guidance for 2008 with a lower payout ratio of 60 to 65 percent. With the lower Canadian dollar, we further believe that this level of performance is sustainable through 2009, with upside if a severe economic downturn is avoided. We will provide more formal guidance for 2009 once our budget is approved in December," said Mr. Kubera.



Statements of Distributable Cash for the Three and Nine Months Ended
September 30, 2008 and 2007

Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------
CAD thousands, except as noted 2008 2007 2008 2007
----------------------------------------------------------------------------
Canexus LP
Net Income 4,768 21,361 10,875 50,337
Charges and Credits to Income Not
Involving Cash:
Future Income Taxes (Recovery) (3,073) 1,220 (1,961) 2,814
Amortization 11,151 11,034 31,814 32,804
Unrealized (Gains) Losses on
Currency Translation 12,946 (12,070) 21,766 (30,032)
Change in Fair Value of Foreign
Exchange Options 374 (670) 1,679 (688)
Change in Fair Value of Foreign
Exchange Forward (630) (86) (630) (5)
Change in Fair Value of Electricity
Forward Swaps - 2,908 - 1,429
Change in Fair Value of Interest
Rate Swaps 420 - (1,625) -
Accrual for Future TCP Severance
Costs - - 7,310 -
Other 3,425 (1,106) 5,222 557
----------------------------------------------------------------------------
29,381 22,591 74,450 57,216
Contributions to Defined Benefit
Pension Plan - (590) (2,444) (1,776)
Purchase of Foreign Exchange Options (372) (360) (1,102) (360)
Expenditures on Asset Retirement
Obligations (417) (32) (446) (536)
Changes in Non-Cash Operating Working
Capital and Due to Affiliates, Net 10,176 1,126 (10,780) (2,228)
----------------------------------------------------------------------------
Cash From Operating Activities 38,768 22,735 59,678 52,316
Changes in Non-Cash Operating Working
Capital and Due to Affiliates, Net (10,176) (1,126) 10,780 2,228
Maintenance Capital Expenditures (2,126) (2,518) (5,934) (8,987)
Amortization of the Purchase Cost of
Foreign Exchange Options (582) (60) (942) (640)
Operating Non-Cash Items (1,108) 2,088 106 2,116
----------------------------------------------------------------------------
Distributable Cash within Canexus LP
(1) 24,776 21,119 63,688 47,033
----------------------------------------------------------------------------

Canexus Income Fund
Share of Canexus LP's Distributable
Cash (1) 9,306 8,149 24,225 18,148
Trust Administration Expenses (58) (85) (234) (217)
----------------------------------------------------------------------------
Distributable Cash available to
Canexus Income Fund (1) 9,248 8,064 23,991 17,931
----------------------------------------------------------------------------
Cash Distributions Declared 4,405 6,943 13,120 20,831
----------------------------------------------------------------------------
Payout Ratio (1) 48% 86% 55% 116%
----------------------------------------------------------------------------
Payout Ratio Normalized for Timing of
Maintenance Capital Expenditures of
$14 million for 2008 (1) 50% 90% 59% 120%
----------------------------------------------------------------------------
Note:
(1) See comments concerning non-GAAP Measures at end of release.


Operations Highlights

Canexus has a total of six manufacturing plants - five in Canada and one in Brazil - organized into three business units. Highlights for each unit are as follows:

- North America sodium chlorate:

-- Third quarter sales revenue for the North American sodium chlorate segment was $58.0 million, a 20 percent increase from the comparable period in 2007 due to increased sales volumes of eight percent and ten percent higher realized selling prices. The increase in realized selling prices was due to price increases implemented in the first and third quarters of 2008. The increase in sales volumes was primarily due to strong demand from US customers. Gross margins decreased to 32 percent from 33 percent in the same period last year due to higher electricity costs particularly at our Bruderheim, Alberta, plant and slightly higher fixed costs, offset by increased production at our low-cost Brandon, Manitoba, facility following start-up on February 17, 2008, of our expansion project.

-- The Brandon, Manitoba, Phase 7 plant expansion continues to exceed the 33,000 tonne project target and it provides debottlenecking opportunities that could add up to an additional 30,000 to 40,000 tonnes of capacity over the next two to five years.

- North America chlor-alkali:

-- Sales revenue for the North American chlor-alkali segment increased to $40.9 million in the third quarter from $34.9 million for the same period last year as a result of a three percent increase in sales volumes and 16 percent higher realized selling prices. The increase in realized selling prices was due to significant caustic soda price increases partially offset by lower chlorine prices. Gross margins decreased to 34 percent from 38 percent for the same period last year primarily as a result of higher natural gas costs and higher fixed costs offset somewhat by lower electricity costs. The plant operated at an average rate of 93 percent to manage chlorine inventory levels for third quarter of 2008 compared to 100 percent for the three months ended September 30, 2007.

-- Further significant caustic soda price increases have been implemented for the fourth quarter.

-- The North Vancouver chlor-alkali plant is currently operating at full rates as manufacturers in the US gulf coast were temporarily impacted by Hurricane Ike. Full operating rates are expected to continue into November and then should decrease somewhat for the balance of the fourth quarter due to the traditional slowdown in the water treating season.

- South America:

-- Third quarter sales revenue in Brazil was $31.4 million, an increase of 44 percent from the same period last year due to higher sales volume and higher realized selling prices. Sodium chlorate sales volume increased by 17 percent and chlor-alkali sales volumes increased by eight percent. The increase in sales volumes was due to continued high demand for both sodium chlorate and caustic soda by our primary customer. The increase in realized selling prices was due to the pass-through nature of the contract with our primary customer, which contributes to higher sales revenues as costs increase. The increase in costs for the quarter as compared to same time last year was primarily due to the strengthening of the Brazilian Real against the US dollar. A decline in gross margin percentages to 25 percent from 31 percent in the third quarter last year was the result of the significant purchase and resale of caustic soda to our primary customer which activity generates no margin, as well as the impact on our fixed US dollar margins of the strengthening in the Canadian dollar from Q3/07 to Q3/08. Absolute gross margins increased 14 percent from $6.8 million in Q3/07 to $7.7 million in Q3/08.

-- A 2,000 tonne incremental sodium chlorate expansion is on schedule for startup in January 2009 which will be followed by a further 4,400 tonne expansion due to start-up in Q1 2010.

Technology Conversion Project (TCP) Update

The TCP at the North Vancouver chlor-alkali facility is scheduled for completion in Q1 2010. The $208-million project is expected to contribute an estimated $35-43 million in incremental annual operating cash flow. Sixty percent of the project value is generated by cost savings. TCP is being financed from excess distributable cash, our Distribution Reinvestment Plan (DRIP) and our committed credit facilities.

Updates for the quarter include:

- Detailed engineering 77 percent complete

- Procurement 72 percent complete

- 90,000 hours worked without a recordable incident

- 53 percent of TCP budget committed with costs fixed and 22 percent spent.

Financial Updates

- Foreign exchange and Long-term debt: Canexus LP has secured Canadian dollar foreign exchange call option contracts on US $5.0 million per month which entitle Canexus LP to sell US dollars and acquire Canadian dollars at a price of US $0.9588 per Canadian dollar through December 31, 2008. These options are designed to protect our cash flows if the Canadian dollar strengthens while still allowing our cash flow to benefit from any devaluation of the Canadian dollar relative to the US dollar. All of our US dollar net cash flow is currently benefiting from the significant weakening in the Canadian dollar which closed October 21 at US $0.8239. To further manage the exposure to the Canadian/US exchange rate, all long-term debt is borrowed in US dollars.

- Mark-to-market losses in fair value of foreign exchange options contracts of $0.4 million in the third quarter of 2008 ($0.7 million of gains in Q3/07) were offset by $0.1 million of realized gains ($0.6 million in Q3/07).

- During the three months ended September 30, 2008, fluctuations in exchange rates resulted in unrealized losses of $12.9 million ($10.8 million on US dollar denominated debt) and realized gains of $1.3 million ($0.9 million as a result of credit facility repayments in the quarter) as compared to $12.1 million of unrealized gains in Q3/07 ($12.6 million on US dollar denominated debt) and $1.0 million of realized losses. The weakening of the Canadian dollar in 2008 through September 30 has resulted in the reversal of $20.4 million of the $38.4 million of unrealized gains on our US dollar debt recorded since our initial public offering in August, 2005.

- Capital expenditures: Capital expenditures for the three months ended September 30, 2008, were $24.5 million as compared to $13.6 million for the same period last year. Increased spending on continuous improvement projects of $1.5 million and $9.8 million on expansion projects was partially offset by $0.4 million lower spending on maintenance capital projects. Higher expansion capital expenditures related to the TCP at our North Vancouver plant. Both maintenance capital expenditures as well as expansion capital for the year are expected to be somewhat lower than anticipated due to timing. We now expect maintenance spending of approximately $14 million and expansion capital expenditures of $80 million in 2008.

- Expenses and Other Income: General and administrative costs in the third quarter of 2008 were up $1.4 million from the same period in 2007 as a result of adjustments in the quarter to reflect revised year-to-date estimates for employee benefit costs. In addition to higher employee costs in 2008 we have increased spending on business development activities. Included in other income are realized and unrealized currency translation gains and losses as discussed above. We have not designated our US-dollar denominated debt, foreign exchange options contracts, interest rate swaps, foreign exchange forward or electricity forward swap contracts as hedges for accounting purposes and hence the fair value impact of these items flows through other income. In the third quarter of 2008, Canexus did not have any electricity forward swap contracts outstanding. We recorded $2.9 million of mark-to-market losses on electricity forward swap contracts in the third quarter of 2007. The change in fair value of interest rates swaps entered into in 2008 was a mark-to-market loss of $0.4 million in the quarter and a gain of $1.6 million year-to-date. In August 2008, we entered into a forward exchange contract to buy JPY1.74 billion at a rate of 108.11 JPY per US dollar on May 20, 2009 to satisfy a purchase commitment related to TCP. At September 30 we recorded mark-to-market gains of $0.6 million on this forward exchange contract. Also in the quarter, in light of current market conditions, we recorded a $1.6 million allowance for impairment in our non-bank sponsored asset backed commercial paper and a $0.7 million increase in our general allowance for doubtful accounts receivable.



Operating Results for the Three and Nine Months Ended
September 30, 2008 and 2007

Three Months Ended Nine Months Ended
September 30 September 30
CAD thousands 2008 2007 2008 2007
----------------------------------------------------------------------------

Revenues
Sales 130,373 104,990 349,864 310,276
----------------------------------------------------------------------------

Expenses
Cost of Goods Sold 90,503 68,872 251,931 219,256
Amortization 11,151 11,034 31,814 32,804
General and Administrative 8,849 7,417 23,788 22,720
Interest 2,992 3,091 8,180 9,003
----------------------------------------------------------------------------
113,495 90,414 315,713 283,783
----------------------------------------------------------------------------

Income before Other Income
(Expense) and Income Taxes 16,878 14,576 34,151 26,493
Other Income (Expense) (14,636) 9,408 (23,665) 28,488
----------------------------------------------------------------------------
Income before Income Taxes 2,242 23,984 10,486 54,981
----------------------------------------------------------------------------

Provision for Income Taxes
Current 547 1,403 1,572 1,830
Future (3,073) 1,220 (1,961) 2,814
----------------------------------------------------------------------------
(2,526) 2,623 (389) 4,644
----------------------------------------------------------------------------

Net Income 4,768 21,361 10,875 50,337
----------------------------------------------------------------------------


Financial Statements, Conference Call and Webcast

Financial Statements and Management's Discussion and Analysis will be posted on the Canexus web site at www.canexus.ca as soon as available. Management will host a conference call at 8 a.m. MT on October 23, 2008, to discuss the results. Please call 416-644-3414 or 1-800-732-6179 to access the call. The call will be webcast live and archived on the Canexus web site. A replay will be available by telephone until midnight on October 30, 2008.

Non-GAAP measures

Gross margin, gross margin percentage, payout ratio and distributable cash are non-GAAP financial measures, but management believes they are useful in measuring the Fund'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 Fund's performance or as a measure of the Fund's liquidity and cash flow. The Fund's method of calculating non-GAAP measures may differ from the methods used by other issuers and accordingly, the Fund's non-GAAP measures are unlikely to be comparable to similarly titled measures used by other issuers.

Forward Looking Statements

This news release contains forward-looking statements and information relating to expected future events and financial and operating results of the Fund, Canexus LP and its subsidiaries that involve risks and uncertainties. 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. These 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 Fund's Annual Information Form for the period ended December 31, 2007, which is filed on the Fund'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 Fund and Canexus LP disclaim 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. Financial outlook information contained in this press 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. Such financial outlook information 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 five plants in Canada and one 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 targets opportunities to maximize unitholder returns and delivers high-quality products to its customers. Canexus is listed on the Toronto Stock Exchange under the symbol CUS.UN. More information about Canexus is available at www.canexus.ca.

Contact Information

  • Canexus Limited
    Gary Kubera
    President and CEO
    (403) 571-7300
    or
    Canexus Limited
    Richard McLellan
    CFO
    (403) 571-7300
    Website: www.canexus.ca