Canexus Income Fund
TSX : CUS.UN

Canexus Income Fund

April 24, 2007 06:00 ET

Canexus Income Fund Announces First Quarter Results

Solid Start to 2007 with Growth in Sight

CALGARY, ALBERTA--(CCNMatthews - April 24, 2007) - Canexus Income Fund (TSX:CUS.UN) (the "Fund") today announced its results for the first quarter ended March 31, 2007. Unless otherwise noted, the Fund is reporting the 100 per cent results of Canexus Limited Partnership (Canexus LP), of which the Fund indirectly owns 38.6 per cent.

Highlights:

- Declared $6.9 million in cash distributions at a payout ratio of 101 per cent; expect to maintain distributions for 2007 at a payout ratio of 95 per cent assuming a Canadian dollar exchange rate of US$0.85

- Brandon sodium chlorate plant expansion project is on budget and scheduled for start-up at the beginning of 2008, adding an estimated $10 million of EBITDA annually based on current business conditions

- North America sodium chlorate pricing increases implemented in past quarters deliver strong margins

- Continuous improvement projects(CIP) initiated, including projects at two plants to take advantage of by-product hydrogen, will contribute an estimated $4 million of EBITDA annually when completed next year

- North America chlor-alkali business announced price increases for the second quarter as contracts allow; the North Vancouver plant resumed full operating rates in late January, with rates expected to remain high throughout 2007

- Technology conversion project at North Vancouver is moving to final engineering and permitting stage; evaluation continues of infrastructure enhancement to facilitate importing of caustic soda

"Canexus had a solid first quarter with our results generally in line with expectations," said Gary Kubera, President and CEO. "Gains from recently implemented price increases for sodium chlorate were offset by slightly lower sales volumes and higher electricity prices in Alberta, along with reduced operating rates at North Vancouver in the first three weeks of January. When combined with a relatively lower Canadian dollar during the quarter, the price increases had a positive impact on our realized prices and gross margins compared to the fourth quarter of last year. We have also announced chlor-alkali price increases for the second quarter that will be implemented as contracts allow. The fundamentals of our markets remain strong and we continue to be comfortable with our outlook of a 95 per cent annual payout ratio for 2007, based on a Canadian/US dollar exchange rate of US$0.85."

"The $50-million expansion of our Brandon facility remains on budget and on schedule, with site construction getting underway during the quarter. When completed in early 2008, the expansion will further extend our low-cost competitive advantage and add approximately $10 million of EBITDA annually. Additionally, we also anticipate an estimated $4 million in annualized EBITDA from continuous improvement projects initiated, including projects at two of our plants to take advantage of by-product hydrogen. The incremental EBITDA from our sodium chlorate business and CIP should more than offset any softening of chlor-alkali prices that may occur in the next few years."

"At our North Vancouver chlor-alkali facility, we are moving to the next phase of the technology conversion project which will include further advancing engineering, permitting and discussions with various stakeholders. The $180-million project to convert to membrane technology will reduce costs and increase capacity if implemented. We also continue to assess enhancing our North Vancouver infrastructure to facilitate caustic soda importing in response to last year's closure of a regional competitor's plant," said Mr. Kubera.



Fund's Statement of Distributable Cash

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(Expressed in Thousands of Canadian Dollars,
except per unit amounts) First quarter ended
(Unaudited) March 31, 2007
---------------------
Canexus LP
Net Income $ 11,510
Provision for Income Taxes 642
Depreciation and Amortization 10,873
Interest Expense 3,034
---------------------
EBITDA 26,059
Unrealized Gains on Currency Translation (2,935)
Change in Fair Value of Foreign Exchange Options, net (8)
Change in Fair Value of Electricity Forward Swaps 277
Interest Expense (3,034)
Maintenance Capital Expenditures (2,274)
Cash Income Taxes (57)
---------------------
Distributable Cash within Canexus LP 18,028
---------------------
---------------------

Canexus Income Fund
Weighted Average Share of Canexus LP's Distributable
Cash 6,956
Trust Administration Expenses (81)
---------------------
Distributable Cash available within Canexus Income
Fund (1) 6,875
---------------------
---------------------

Cash Distributions Declared $ 6,944
---------------------
---------------------

---------------------
Payout Ratio 101%
---------------------

Payout Ratio Normalized for Timing of Estimated
Maintenance Capital Expenditures of $14.0 million
for 2007 108%
---------------------


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:

-- First quarter sales revenue for the North American sodium chlorate segment was $50.1 million in 2007, a one per cent increase from the comparable period in 2006 and a four per cent increase from the previous quarter. Lower sales volumes of two per cent were offset by higher selling prices and a slight weakening of the Canadian dollar against the US dollar compared to the first quarter of 2006. Prices increased over 5% from the fourth quarter of 2006. Gross margins for the quarter increased to 29 per cent from 26 per cent in the comparable quarter of last year as a result of higher realized selling prices, offset by higher period costs per unit due to slightly lower production volumes in 2007.

-- Demand remained steady in the North America sodium chlorate market in first quarter 2007 due to strong pulp mill operating rates and a healthy bleached pulp market. The pulp market is expected to remain strong through 2007 and sodium chlorate operating rates are projected to remain robust for the duration of the year, with tight supply maintaining price momentum, particularly for U.S. customers.

-- Site construction has begun on the Brandon plant expansion project. The project is both on schedule and on budget with more than 75 per cent of total estimated project costs committed. This expansion project will boost plant capacity by approximately 12 per cent when completed early in the first quarter of 2008.

- North America chlor-alkali:

-- Sales revenue for the North American chlor-alkali segment was $33.4 million in the first quarter of 2007, a decrease of seven per cent from the same period in 2006 and an increase of 12 per cent from the previous quarter. The decrease from the comparable period is primarily a result of lower realized selling prices. Gross margins for the first quarter of 2007 declined to 28 per cent from 35 per cent in the same period of 2006 primarily due to the decline in realized selling prices, reduced operating rates for the first three weeks of January 2007 and higher maintenance and period costs. The significant increase in sales revenue as compared to the previous quarter was due to a slight increase in realized selling prices combined with an 11% increase in sales volumes. Margins decreased from 31% to 28% as a result of higher energy and salt costs.

-- Price increases announced for the second quarter for chlor-alkali products have been implemented as customer contracts allow.

-- The technology conversion project at North Vancouver is moving ahead to complete advanced engineering, permitting and stakeholder discussions in advance of being considered for final approval by the Board of Directors. This next phase of the project is expected to cost $11 million. The project, with an estimated cost of approximately $180 million, will provide significant cost savings from reduced period costs and will also eliminate over 75% of our natural gas and 12% of our electricity consumption per unit. It is also supported by strengthened market dynamics, with reduced Canadian supply following the closure of The Dow Chemical Co. chlor-alkali facility in Fort Saskatchewan, Alberta. The regional market is heavily dependent on imported caustic that is subject to significant transportation costs.

-- Canexus continues to evaluate the opportunity to enhance existing North Vancouver infrastructure to facilitate caustic soda importing to supplement current production and better serve our existing customers that will be affected by the Dow facility closure. The first phase of the caustic importing project could be operating as early as mid-2007.

- South America:

-- First quarter sales revenue in Brazil was $22.6 million, an increase of seven per cent from the comparable period of 2006 and consistent with the previous quarter. Increases in realized selling prices for both chlorate and chlor-alkali were offset by a decline in sales volumes from the comparable quarter. The decline in sales volumes is primarily the result of lower sodium chlorate sales into the merchant market. Some of the product sold into the merchant market is shipped from our Bruderheim, Alberta facility which attracts significant transportation costs. Increased demand from contract customers in North America has reduced sodium chlorate available for export to Brazil. Gross margins increased to 31 per cent from 29 per cent the prior year due primarily to lower sales to the merchant market which attract lower gross margins.

-- Canexus operations in Brazil are well positioned to deliver strong results for 2007, with demand for sodium chlorate continuing to be strong in the region. South America remains a key investment region for the sodium chlorate industry given the significant access to low cost, renewable wood fibre for pulp and paper production, the number of new pulp production expansion projects planned for the region, relatively stable energy prices and supportive government policy.

Financial Updates

- Foreign exchange and Long-term debt: On December 6, 2006, Canexus acquired foreign exchange call options on US$5.0 million per month (more than half our net US dollar cash flow per month) which entitles us to sell US dollars and acquire Canadian dollars at a price of US $0.87 per Canadian dollar from January 17, 2007 through to July 11, 2007. 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 long-term debt is denominated in US dollars and we continue to take advantage of opportunities to purchase materials and equipment for our Brandon expansion in US dollars to further manage currency risk. Before the impact of hedging instruments, every US$0.01 change in the Canadian/US dollar exchange rate inversely affects net income before taxes by $1.5 million Canadian per year.

- Mark-to-market changes in fair value of foreign exchange options contracts of $0.3 million in the first quarter of 2007 were offset by $0.1 million of realized gains.

- During the three month period ended March 31, 2007 fluctuations in exchange rates resulted in $2.9 million of unrealized gains($2.1 million on US dollar denominated long-term debt) and $0.2 million of realized gains on currency translation.

- Capital expenditures: Capital expenditures for the three-month period ended March 31, 2007, were $11.1 million compared to $4.0 million for same period in 2006. The increase is due primarily to expenditures on our Brandon expansion project ($7.8 million) and the North Vancouver technology conversion project ($0.7 million). We continue to expect full year spending on maintenance capital of $14.0 million(Q1/07 - $2.3 million) and $6.6 million(Q1/07 - $0.1 million) on margin enhancing continuous improvement projects. In addition our maintenance repairs and expense budget for 2007 is $17.1 million, a consistent level of spending with prior years.

- Expenses and Other Income: General and administrative costs in the first quarter of 2007 increased from the same period in 2006 as a result of higher costs associated with operating our stand-alone Information Technology environment and in performing other finance and administrative functions previously provided by Nexen Inc. under a transition services agreement which was concluded in December 2006. Included in other income are realized and unrealized currency translations gains and losses as discussed above. We have not designated our US-dollar denominated debt, foreign exchange options contracts 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 first quarter, electricity forward swaps had a mark-to-market change in fair value of $0.3 million(loss). These contracts cover over 70% of our 2007 electricity requirements for our Bruderheim, Alberta plant.



Operating Results for the Three-Month periods ended March 31, 2007 and 2006

(Expressed in Thousands of
Canadian Dollars) Three months ended
(Unaudited) March 31, 2007 March 31, 2006
----------------------------------------------------------------------------

Revenues
Sales $ 106,079 $ 106,609
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Expenses
Cost of Goods Sold 75,320 75,060
Depreciation and Amortization 10,873 9,961
General and Administrative 7,505 6,942
Interest 3,034 2,445
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96,732 94,408
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Income before Other Income and Income
Taxes 9,347 12,201

Other Income (Expense) 2,805 (1,020)
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Income before Income Taxes 12,152 11,181
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Provision for Income Taxes
Current 57 329
Future 585 330
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642 659
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Net Income $ 11,510 $ 10,522
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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 12:30 p.m. MT on April 24, 2007, to discuss the results. Please call 416-644-3416 or 1-800-732-0232 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 May 2, 2007.

Non-GAAP measures

EBITDA 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 may not 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, 2006, 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.

About Canexus

Canexus produces sodium chlorate and chlor-alkali products in several plants throughout Canada and Brazil, largely for the pulp and paper and water treatment industries. Canexus operates reliable, strategically-located, low-cost production 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