Canexus Income Fund
TSX : CUS.UN

Canexus Income Fund

April 24, 2008 06:00 ET

Canexus Income Fund Announces First Quarter Results

Excellent Start to 2008 Expected to Continue

CALGARY, ALBERTA--(Marketwire - April 24, 2008) - Canexus Income Fund (TSX:CUS.UN) (the "Fund") today announced its results for the first quarter ended March 31, 2008. Unless otherwise noted, the Fund is reporting the 100 per cent results of Canexus Limited Partnership (Canexus LP), of which the Fund indirectly owns 38.4 per cent.

Highlights:

- North American sodium chlorate sales volumes for first quarter increased five per cent from same period last year and one per cent from the prior quarter and realized prices increased 9 per cent from Q4/07

- Brandon sodium chlorate plant expansion project completed in February and performing above target

- Strong caustic soda markets helped offset seasonally weaker chlorine markets in the North America chlor-alkali business, with caustic price increases announced for the second quarter

- Technology Conversion Project (TCP) at North Vancouver facility received board approval in January and is expected to contribute an estimated $35-43 million in incremental annual operating cash flow upon completion in first quarter of 2010

- South America sales revenue increased seven per cent from same period last year; 2,000 tonne sodium chlorate expansion at plant in Brazil scheduled for startup in January 2009

- Declared $4.3 million in cash distributions at a payout ratio of 55 per cent (62 per cent normalized for the timing of maintenance capital spending); we expect distributable cash for 2008 to be 12% higher than previous estimates and as a result we are revising guidance to a lower payout ratio of between 75 and 80 per cent assuming a Canadian dollar exchange rate of parity

- Canadian dollar foreign exchange call options on US$5 million per month purchased in April entitle Canexus to sell US dollars at a price of US$0.9709 per Canadian dollar, extending existing contract coverage from May 31 to August 31, 2008, on the same terms.

"Canexus had a solid first quarter, with our financial results ahead of expectations and significant progress on strategic initiatives," said Gary Kubera, President and CEO. "Sales revenues benefited from strong sodium chlorate volumes and price increases implemented in the quarter and a relatively stable Canadian dollar. Stable chlor-alkali prices despite the seasonally weaker chlorine market have us well positioned to benefit from caustic soda price increases in the second quarter. Results were also strong in South America and we began a sodium chlorate debottlenecking project at our plant in Brazil."

"The Phase 7 expansion of our Brandon facility started production on February 17 and was quickly exceeding the 33,000 tonne project target, with debottlenecking options to further increase plant capacity being studied. The expansion is timely given that demand for sodium chlorate in North America has remained very strong due to solid pulp market dynamics and positive price momentum is expected to continue this year. Also, Canexus has acquired and is now serving customer contracts from Olin Corporation following the announced closure of their Dalhousie, New Brunswick, sodium chlorate plant. The combined impact of these contracts and a solid market outlook means we will run all our North American plants throughout 2008. As a result, we will be investing additional maintenance capital in 2008 and now expect full year maintenance capital spending to be approximately $15.5 million."

"We are pleased to be underway on TCP at our North Vancouver chlor-alkali facility following board approval at the end of January. This project will increase our per unit distributable cash by an estimated 40 per cent when it is completed in early 2010. TCP will continue our proven track record for successful projects that grow capacity and enhance the competitive position of our low-cost, flagship operations. We are delighted with the support of the Distribution Reinvestment Plan we introduced in February to partially finance TCP. In addition to Nexen's 100 per cent participation, one-quarter of our public unitholders are participating and we appreciate their vote of confidence."

"We feel confident improving our guidance for 2008 based on the strength of our North American and Brazilian markets. Our payout ratio for 2008 is now expected to be between 75 and 80 per cent based on the Canadian dollar at parity," said Mr. Kubera.



Statement of Distributable Cash

Three Months Three Months
Ended Ended
March 31, March 31,
CAD thousands, except as noted 2008 2007
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Canexus LP
Net Income (Loss) (3,347) 11,510
Charges and Credits to Income Not Involving Cash:
Future Income Taxes (48) 585
Amortization 9,942 10,873
Unrealized (Gains) Losses on Currency
Translation 7,991 (2,935)
Change in Fair Value of Foreign Exchange
Options 948 262
Change in Fair Value of Electricity Forward
Swaps - 277
Change in Fair Value of Interest Rate Swaps (166) -
Accrual for Future TCP Severance Costs 7,310 -
Other 842 740
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23,472 21,312
Contributions to Defined Benefit Pension Plan - (593)
Expenditures on Asset Retirement Obligations - -
Purchase of Foreign Exchange Options (357) -
Changes in Non-Cash Operating Working
Capital and Due to Affiliates, Net (10,547) (2,748)
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Cash From Operating Activities 12,568 17,971

Changes in Non-Cash Operating Working
Capital and Due to Affiliates, Net 10,547 2,748
Maintenance Capital Expenditures (1,436) (2,274)
Amortization of the Purchase Cost of Foreign
Exchange Options (179) (263)
Operating Non-Cash Items (597) (154)
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Distributable Cash within Canexus LP 20,903 18,028
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Canexus Income Fund
Share of Canexus LP's Distributable Cash 8,057 6,956
Trust Administration Expenses (88) (81)
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Distributable Cash available to Canexus
Income Fund 7,969 6,875
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Cash Distributions Declared 4,345 6,944
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Payout Ratio 55% 101%
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Payout Ratio Normalized for Timing of
Maintenance Capital Expenditures of $15.5
million for 2008 62% 108%
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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 $52.3 million, a four per cent increase from the comparable
period in 2007. Increased sales volumes of five per cent were offset
only slightly by lower realized selling prices. Price increases
implemented in 2007 and in January 2008 almost entirely offset the 16
per cent appreciation in the Canadian dollar between quarters. The
increase in sales volumes was due to strong demand from US customers.
Gross margins increased to 30 per cent from 29 per cent in the same
period last year primarily due to overall lower per unit production
costs as a result of increased production volumes between quarters, and
increased production at our low-cost Brandon plant following start-up
in February of our expansion project, offset by higher electricity
costs incurred by our Bruderheim, Alberta, plant.
- Demand strengthened in the North American sodium chlorate market during
the first quarter of 2008, with increased exports and increased domestic
demand due to a strong pulp market and high pulp prices. Healthy
fundamentals, coupled with the continued strength of the Canadian
dollar, enabled sodium chlorate price increase announcements effective
in the first quarter of 2008. North American pulp mills are operating at
high rates and some have completed projects to increase pulp throughput,
further increasing sodium chlorate demand.
- The Brandon, Manitoba, Phase 7 plant expansion successfully came
on-stream February 17, 2008. The expansion quickly exceeded the 33,000
tonne project target and studies are planned to determine
debottlenecking opportunities.
- Canexus has acquired customer contracts from Olin Corporation following
the announced closure of their 20,000 metric tonne Dalhousie, New
Brunswick, sodium chlorate manufacturing facility in the first quarter
of 2008.

- North America chlor-alkali:
- Sales revenue for the North American chlor-alkali segment was $32.3
million in the first quarter, a decrease of 3 per cent from the same
period last year. The decrease was due to a decline in sales volumes
from weaker chlorine sales and lower realized selling prices for
chlorine caused both by demand and the significantly stronger Canadian
dollar. Gross margins increased to 30 per cent from 28 per cent for the
same period last year primarily due to lower electricity and period
costs and higher production volumes.
- The caustic soda market in North America experienced several supply
challenges during the first quarter of 2008 opposite strong demand in
most sectors. Caustic prices are rising significantly, partially offset
by a decline in chlorine prices associated with softer chlorine demand.
High energy costs and the tight caustic market are enabling MECU price
improvement which is expected to continue through the third quarter of
2008.
- The Technology Conversion Project (TCP) for the North Vancouver
chlor-alkali facility was approved by the board of directors at the end
of January. The $208-million project scheduled for completion in Q1 2010
is expected to contribute an estimated $35-43 million in incremental
annual operating cash flow. Sixty per cent of the project benefits come
from decreased variable and fixed production costs with the balance
resulting from expanding capacity. TCP is being financed from excess
distributable cash, our Distribution Reinvestment Plan (DRIP) and a
committed increase in our credit facility.

- South America:
- First quarter sales revenue in Brazil was $24.2 million, an increase of
7 per cent from the same period last year. Significant increases in
caustic soda sales volume and higher chlor-alkali realized selling
prices were partially offset by a decline in sodium chlorate realized
selling prices. Lower electricity costs contributed to the decline in
sodium chlorate prices due to the pass-through nature of the contract
with our primary customer, which contributes to lower sales revenues as
costs decrease. A decline in gross margin percentages to 24 per cent
from 31 per cent in the first quarter last year was the result of
significant caustic soda purchases on the open market to supply our
primary customer's increased demand which generate no margin as well as
the impact on our fixed US dollar margins of the significant
strengthening in the Canadian dollar from Q1/07 to Q1/08. Brazil gross
margins for the first quarter of 2008 were $5.9 million, up from $5.6
million in Q4/07.
- A 2,000 tonne incremental sodium chlorate expansion in progress at
Canexus' Brazil manufacturing plant is scheduled for startup in January
2009, and options for further, more significant expansions are being
evaluated to enable Canexus to secure additional supply positions in
the growing sodium chlorate market. Management believes Canexus LP is
well positioned to take advantage of growth opportunities associated
with the pulp and chemical industries in South America.


Financial Updates

- Foreign exchange and Long-term debt: Canexus LP has now 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 $0.9709 per Canadian dollar from March 1, 2008 through August 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. To further manage the exposure to the Canadian/US exchange rate, all long-term debt is borrowed in US dollars and Canexus LP incurs other expenditures in US dollars.

- Mark-to-market losses in fair value of foreign exchange options contracts of $0.9 million in the first quarter of 2008 ($0.3 million in Q1/07) were offset by $0.6 million of realized gains ($0.1 million in Q1/07).

- During the three months ended March 31, 2008, fluctuations in exchange rates resulted in unrealized losses of $8.0 million ($8.3 million on US dollar denominated debt) and realized gains of $1.0 million as compared to $2.9 million of unrealized gains in Q1/07 ($2.1 million on US dollar denominated debt) and $0.2 million of realized gains.

- In March 2008, Canexus LP entered into interest rate swap agreements under which we pay US LIBOR interest at a fixed rate of 3.2 per cent and receive interest at 3 month US LIBOR floating rates on a notional amount of US$50.0 million for the period April 11, 2008 through April 10, 2013. We recorded mark-to-market gains of $0.2 million in Q1/08.

- Capital expenditures: Capital expenditures for the three months ended March 31, 2008, were $13.8 million as compared to $11.1 million for same period last year. This increase was primarily due to an increase in expansion capital expenditures of $3.4 million. Higher expenditures related to the TCP at our North Vancouver plant (increase of $7.3 million) were offset by lower expenditures related to the expansion of our Brandon, sodium chlorate plant (decrease of $3.9 million). We continue to expect full year spending on expansion capital of $89.0 million.

- Expenses and Other Income: General and administrative costs in the first quarter of 2008 were flat from the same period in 2007. 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 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, Canexus did not have any electricity forward swap contracts outstanding. In the first quarter we recorded estimated future TCP severance costs of $7.3 million. Following start-up we expect to permanently reduce our workforce at this facility by approximately one-third.



Operating Results for the Three-Month periods ended March 31, 2008 and 2007

(Expressed in Thousands of Canadian Dollars) Three months ended
(Unaudited) March 31, March 31,
2008 2007
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Revenues
Sales $ 108,728 $ 106,079
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Expenses
Cost of Goods Sold 77,500 75,320
Amortization 9,942 10,873
General and Administrative 7,430 7,505
Interest 2,442 3,034
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97,314 96,732
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Income before Other Income (Expense) and
Income Taxes 11,414 9,347
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Other Income (Expense)
Accrual for Future TCP Severance Costs (7,310) -
Unrealized Gains (Losses) on Currency
Translation (7,991) 2,935
Changes in Fair Value of Derivative
Instruments (782) (539)
Other 1,649 409
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(14,434) 2,805
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Income (Loss) before Income Taxes (3,020) 12,152
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Provision for Income Taxes
Current 375 57
Future (48) 585
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327 642
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Net Income (Loss) $ (3,347) $ 11,510
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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 1:30 p.m. MT on April 24, 2008, to discuss the results. Please call 416-644-3419 or 1-800-731-5774 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 1, 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.

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