Canexus Income Fund
TSX : CUS.UN

Canexus Income Fund

April 22, 2009 20:52 ET

Canexus Income Fund Announces First Quarter Results

Record Quarter Financial Performance Delivered

CALGARY, ALBERTA--(Marketwire - April 22, 2009) - Canexus Income Fund (TSX:CUS.UN) (the "Fund") today announced its results for the first quarter ended March 31, 2009. Unless otherwise noted, the Fund is reporting the 100 percent results of Canexus Limited Partnership ("Canexus LP"), of which the Fund indirectly owns 35.4 percent.

Highlights:

- Record financial performance for the first quarter of 2009, with distributable cash of $27.5 million - the highest quarterly distributable cash generated since Canexus LP's inception and an increase of 31 percent over the first quarter of 2008; Fund declared total cash distributions of $4.5 million for a payout ratio of 46 percent (47 percent when adjusted for timing of maintenance capital spending).

- Revenue increased 14 percent to $123.8 million from $108.7 million from the first quarter of 2008.

- Solid financial performance from North American sodium chlorate with significantly improved gross margins to 41 percent resulting from higher production from our Brandon plant following the expansion completed in early 2008, improved prices and the weaker Canadian dollar.

- The closure of sodium chlorate production at Bruderheim, Alberta, coincides with start-up at the site of the new North American Terminal Operations unit, which trans-loads chlor-alkali products and hydrocarbons for nearby customers through expanded truck loading, rail capacity and product handling; The Board has approved Phase 2 of site development to enable expansion to further diversify hydrocarbon handling at a cost of $3.8 million.

- Chlor-alkali business unit achieved strong results with higher caustic soda prices offsetting reduced volumes and driving improved gross margins; TCP at North Vancouver remains on schedule for start-up in the first quarter of 2010; approximately $165 million of the $208 million budget was spent or committed at March 31, 2009.

- A 2,000-tonne sodium chlorate expansion project at our Brazil plant was completed at the end of January 2009; previously announced 4,400-tonne expansion is underway and expected to start-up in the first quarter of 2010; a US$6.2 million hydrochloric acid expansion project at the facility has been approved by the Board to install a new 20,000MT per year burner to be operational at the start of the third quarter of 2010.

- Total borrowings under committed credit facilities at March 31, 2009, were $310 million with remaining available capacity of approximately $210 million; no debt maturing before August 2011.

"Our excellent results for the first quarter of 2009 continue the strong financial performance achieved last year," said Gary Kubera, President and CEO. "Our recent performance is largely based on higher realized selling prices in North America for sodium chlorate supported by the positive impact of the lower Canadian dollar compared to 2008, and higher caustic soda prices. As expected, sales volumes have decreased, with the uncertain economic climate creating demand weakness from our customers. We remain confident that our low-cost advantages position us to meet the challenges of the current economy."

"Our low-cost Brandon, Manitoba, plant has been a key factor in our North American sodium chlorate business unit's financial performance, allowing us to successfully manage production at our other facilities against the reduced operating rates and high inventories of our pulp mill customers during the quarter. While Brandon has operated at high rates, our analysis of demand trends and the North American supply situation has determined the need to rationalize capacity at our highest cost plant. Accordingly, we have permanently closed sodium chlorate production at our Bruderheim, Alberta, facility, removing approximately 72,000 tonnes of annual capacity from the market."

"Canexus will continue its presence in Bruderheim with our new business unit, North American Terminal Operations, which began operations in April. The plant site located northeast of Edmonton provides a strategic location to apply our logistics experience to trans-load hydrocarbons for nearby Alberta Heartland and oil sands operations, and to support regional chlor-alkali sales. Our Board's approval of a $3.8 million Phase 2 expansion project for further diversifying hydrocarbon handling at the site demonstrates the growth potential of this business."

"In South America, a 2,000-tonne sodium chlorate expansion became operational during the quarter, and a further 4,400 tonne expansion is underway. Our Board has approved a hydrochloric acid expansion project, similar to the project underway at North Vancouver, supported by a long-term customer commitment that will provide flexibility for managing chlorine production. During the first quarter, we maintained high operating rates for sodium chlorate and chlor-alkali and performed our annual maintenance shutdown. While some variability in volumes is anticipated, we expect to benefit from the stability of our long-term fixed US dollar margin contract with our primary customer in 2009."

"Our North American chlor-alkali business unit performed above expectations due to high MECU prices and operating rates above the industry average. Softening of caustic soda demand began during the quarter but we expect some offsetting chlorine pricing stability with the high demand water treating season approaching. TCP remains on schedule for start-up in the first quarter of next year, with mechanical completion in late 2009. During April we will be performing a planned maintenance shutdown for seven days which will also facilitate some key construction activities on TCP."

"While there remains considerable economic uncertainty, we are beginning to see some early signs of emerging stability in our markets. As pricing and volumes find new equilibrium, we will continue to benefit from our low-cost position and the relatively weaker Canadian dollar, which is confirmed through our call option protection for 2009. We also continue to expect that our payout ratio for the year will be between 60 and 70 percent. Looking further ahead, we are optimistic the timing of our current growth projects will further extend our low-cost advantage while generating an expected $50 million in incremental annual operating cash flow that will start to contribute to results in 2010," said Mr. Kubera.



Statement of Distributable Cash

Three Months Ended Three Months Ended
CAD thousands, except as noted March 31, 2009 March 31, 2008
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Canexus LP
Net Income (Loss) 5,749 (3,347)
Realized Foreign Exchange Loss on
Cash 36 -
Charges and Credits to Income Not
Involving Cash:
Future Income Taxes 1,993 (48)
Amortization 11,743 9,942
Unrealized Losses on Currency
Translation 5,124 7,991
Change in Fair Value of Foreign
Exchange Options 5,949 948
Change in Fair Value of Foreign
Exchange Forward 1,916 (166)
Change in Fair Value of Interest
Rate Swaps 509 -
Accrual for Future TCP Severance
Costs (981) 7,310
Other 1,629 952
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Total Charges and Credits to Income
Not Involving Cash 27,882 26,929
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Contributions to / Payments for
Defined Benefit Plans (1) -
Purchase of Foreign Exchange Options - (357)
Expenditures on Asset Retirement
Obligations (33) -
Interest Income on Restricted
Investments (163) (110)
Changes in Non-Cash Operating
Working Capital and Due to
Affiliates (4,748) (10,547)
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Cash From Operating Activities 28,722 12,568
Changes in Non-Cash Operating
Working Capital and Due to
Affiliates 4,748 10,547
Maintenance Capital Expenditures (3,111) (1,436)
Amortization of the Purchase Cost of
Foreign Exchange Options (1,253) (179)
Realized Foreign Exchange Loss on
Cash (36) -
Operating Non-Cash Items (1,595) (597)
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Distributable Cash within Canexus LP (1) 27,475 20,903
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Canexus Income Fund
Share of Canexus LP's Distributable
Cash 9,848 8,057
Trust Administration Expenses (111) (88)
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Distributable Cash available to Canexus
Income Fund (1) 9,737 7,969
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Cash Distributions Declared 4,500 4,345
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Payout Ratio (1) 46% 55%
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Payout Ratio Normalized for Timing
of Maintenance Capital Expenditures
of $14.5 million for 2009 (1) 47% 62%
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Note:
(1) See comments concerning non-GAAP Measures at end of release.


Operations Highlights

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

- North America Sodium Chlorate:

-- First quarter sales revenue for this segment increased nine percent to $57.2 million for the three months ended March 31, 2009, from $52.3 million for same period last year due to a 29 percent increase in realized selling prices partially offset by a 14 percent decline in sales volumes. Realized selling prices increased as a result of price increases implemented in the third quarter of 2008 and first quarter of 2009 and the weaker Canadian dollar relative to the US dollar in the first quarter of 2009 (US$0.81) compared to the first quarter of 2008 (US$1.00). The decrease in sales volumes was due to the deterioration in global pulp demand resulting from the economic downturn. The increase in the gross margin percentage to 41 percent for the three months ended March 31, 2009, from 30 percent for the same period last year was due to the increase in realized selling prices, an increase in production at our low-cost Brandon, Manitoba, facility and lower electricity costs partially offset by lower production volumes and higher fixed costs.

-- With the closure of sodium chlorate production at Bruderheim, Canexus anticipates recording an additional $16-18 million in amortization expense in the second quarter to write off production assets and approximately $5 million in severance and other costs that will be incurred during the next few years.

- North America Chlor-alkali:

-- First quarter sales revenue for this segment increased 31 percent to $42.4 million for the three months ended March 31, 2009, from $32.3 million for same period last year due to 40 percent higher realized selling prices partially offset by a decline in sales volumes of 15 percent. Caustic soda price increases implemented in the third and fourth quarters of 2008 and the first quarter of 2009, combined with the weaker Canadian dollar in the first quarter of 2009, more than offset a decline in chlorine realized selling prices. The decline in sales volumes was due to the economic downturn, exacerbating the construction sector slowdown resulting in lower chlorine derivative demand and a slowdown in the pulp sector in Western Canada resulting in lower caustic soda demand. The gross margin percentage increased from 30 percent to 42 percent due to the increase in realized selling prices and lower electricity and natural gas costs, partially offset by lower production volumes and higher fixed costs.

-- As expected, global caustic soda demand began to decline in the first quarter and caustic soda prices are projected to moderate in 2009.

- South America:

-- First quarter sales revenue in Brazil of $24.3 million for the three months ended March 31, 2009, was consistent with sales revenue of $24.2 million for same period last year. Higher realized selling prices for both sodium chlorate (increase of 32 percent) and chlor-alkali products (increase of 10 percent) and a 3 percent increase in sodium chlorate sales volumes was partially offset by a 9 percent decline in chlor-alkali product sales volumes. The increase in realized selling prices was due to the pass-through nature of the contract with our primary customer which contributes to higher revenues as costs increase. The gross margin percentage declined from 24 percent to 19 percent primarily due to an increase in electricity costs, higher fixed costs as a result of annual plant maintenance costs incurred in March and the purchase of caustic soda up to our chlor-alkali plant's operating capacity volume at market prices, which are presently higher than the price we can bill our primary customer.

-- A US$6.2 million hydrochloric acid project has been approved by the Board. The project, which will enhance the flexibility of chlor-alkali production, is scheduled for completion in mid-2010.

Technology Conversion Project (TCP) Update

The TCP at the North Vancouver chlor-alkali facility has fully committed financing and is scheduled for mechanical completion in late 2009, with start-up near the end of Q1 2010. The 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 is complete

- Major construction is progressing well with mechanical completion in late 2009

- Safety performance continues at a very high level

- $165 million of TCP budget is committed with $85 million of this spent

Financial Updates

- Foreign exchange and Long-term debt: In October 2008, Canexus LP secured Canadian dollar foreign exchange call option contracts on a total of US $10 million per month which entitle Canexus LP to sell US $5 million per month and acquire Canadian dollars at a price of US $0.8200 and to sell US $5 million per month and acquire Canadian dollars at a price of US $0.8170 for the period January 1, 2009, to December 31, 2009. These option contracts cover virtually all of our net exposure to the US dollar for 2009. Total borrowings under our committed credit facilities at March 31, 2009, were $310.0 million with remaining available capacity of approximately $210.0 million. We have no debt maturing before August 2011.

- We recorded mark-to-market losses in fair value of foreign exchange option contracts of $5.9 million in the first quarter of 2009 ($1.0 million mark-to-market loss offset by $0.6 million of realized gains in Q1/08).

- During the first quarter, fluctuations in exchange rates resulted in unrealized losses of $5.1 million ($7.7 million unrealized loss on long-term debt) and realized losses of $1.6 million, compared to unrealized losses of $8.0 million ($8.3 million unrealized loss on long-term debt) and realized gains of $1.0 million during the first quarter of 2008. We borrow in US dollars, which creates unrealized currency translation losses as the Canadian dollar weakens. As a substantial portion of our revenues are denominated in or referenced to the US dollar, our cash flows benefit from a weaker Canadian dollar.

- Capital expenditures: Capital expenditures for the three months ended March 31, 2009, were $36.2 million as compared $13.8 million for the same period in 2008. This increase was due to increases in maintenance capital expenditures of $1.6 million, continuous improvement capital expenditures of $1.7 million and expansion capital expenditures of $19.2 million, offset by a decrease in infrastructure and IT capital expenditures of $0.6 million.

- Expenses and Other Income: General and administrative costs for the three months ended March 31, 2009, were up $1.8 million from the same period in 2008 as a result of slightly higher salary and benefit costs, information technology costs associated with the review and implementation of SAP chemicals best practice processes and increased spending on business development activities. Included in other income (expense) are the realized and unrealized currency translation gains and losses discussed above. We have not designated our US-dollar denominated long-term debt, foreign exchange option contracts, interest rate swaps or foreign exchange forward contracts as hedges for accounting purposes and hence the fair value impact of these items flows through other income (expense) in the quarter. Also in the first quarter, in light of market conditions, we recorded a $0.7 million increase in our general allowance for doubtful accounts receivable. We accrued TCP severance costs of $7.3 million in the first quarter of 2008 and revised this down by $1.0 million in Q1/09 as a result of a current assessment of expected total costs. Following start-up of TCP we expect to permanently reduce our workforce at this facility by approximately one-third. Income taxes increased for the three months ended March 31, 2009, as compared to the three months ended March 31, 2008, due to higher net income and to the recording of future tax expense in certain operating subsidiaries arising from the impact of exchange rate movements.



Operating Results for the Three-Month Period Ended March 31, 2009 and 2008

CAD thousands (Unaudited) 2009 2008
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Revenues
Sales 123,819 108,728
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Expenses
Cost of Goods Sold 77,801 77,500
Amortization 11,743 9,942
General and Administrative 9,260 7,430
Interest 2,208 2,442
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101,012 97,314
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Income before Other Expense and Income Taxes 22,807 11,414
Other Expense (14,864) (14,434)
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Income (Loss) before Income Taxes 7,943 (3,020)
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Provision for (Recovery of) Income Taxes
Current 201 375
Future 1,993 (48)
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2,194 327
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Net Income (Loss) 5,749 (3,347)
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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 4 p.m. ET on April 23, 2009, to discuss the results. Please call 416-644-3418 or 1-800-731-5319. The conference call will also be accessible via webcast at www.canexus.ca. A replay of the conference call will be available until midnight April 30, 2009. To access the replay, call 416-640-1917 or 1-877-289-8525, followed by passcode 21302695#.

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, including with respect to the timing of the Brazil expansions, the stability of sodium chlorate prices, expected volumes of sodium chlorate, the Fund's expected payout ratio, global caustic soda demand, expectations for MECU netbacks, TCP contributions to operating cash flow and capacity additions resulting from the Brandon debottlenecking opportunities. 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 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 four plants in Canada and one in South America 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