Canexus Income Fund
TSX : CUS.UN

Canexus Income Fund

February 25, 2008 20:01 ET

Canexus Income Fund Announces Fourth Quarter and Year-End Results

2007 on Guidance; Excellent Start to 2008 with Brandon Expansion Operational

CALGARY, ALBERTA--(Marketwire - Feb. 25, 2008) - Canexus Income Fund (TSX:CUS.UN) (the "Fund") today announced its results for the fourth quarter and year ended December 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:

- Brandon plant expansion start-up on February 17, 2008, further extends our low-cost position, increases annual revenues and cash flow; combined with an expected 10% increase in North American sodium chlorate pricing provides for an excellent start to 2008;

- Technology Conversion Project ("TCP") at North Vancouver chlor-alkali facility approved on January 31, 2008, expected to contribute $35-43 million in incremental annual operating cash flow upon completion in 2010;

- Annual revenue for 2007 increased two per cent to $413.6 million, based on price increases, despite slightly reduced volumes in North America and the impact of the stronger Canadian dollar; fourth quarter revenue of $103.3 million was a 2.4 per cent increase from the same period in 2006;

- Canadian dollar foreign exchange call options purchased on January 23, 2008, on US $5 million per month entitle Canexus LP to sell US dollars at a price of US $0.9709 per Canadian dollar from March 1, 2008, to May 31, 2008;

- Cash distributions of $26.9 million declared in 2007 with a payout ratio of 122 per cent, consistent with guidance for the year, despite a stronger Canadian dollar;

- Distribution Reinvestment Program ("DRIP") effective for distributions declared for month of February 2008. Proceeds to be used to finance TCP.

"Our results for 2007 were consistent with the guidance provided at mid-year. Our performance for the year was affected by temporary downtime during the second quarter and the significant strengthening of the Canadian dollar," said Gary Kubera, President and CEO. "Fourth quarter results were impacted by the strong Canadian dollar which averaged above parity combined with disproportionately higher maintenance spending that was on track for the year. Despite the challenges during 2007, Canexus remained committed to our strategy and took actions to position the company for future success. These moves included adjusting distributions to a sustainable level that supports capital investment growth, raising sodium chlorate prices, completing the Brandon expansion project and launching TCP. "

"Looking ahead, all three of our business units are poised for growth. We are particularly excited about TCP and the successful start-up of the expansion at our Brandon facility. Both projects further extend our low-cost competitive advantage, reduce costs and increase capacity. Additionally, Brazil continues to be a proven source of revenue growth and we see attractive opportunities for long-term expansion in the region. In addition to the 2000 metric tonne sodium chlorate debottleneck expansion planned for 2008, we continue to consider a series of future debottleneck options at our plant in South America that can efficiently increase our capacity," said Mr. Kubera.

"In 2008, we anticipate favourable market conditions and high operating rates will generally support a positive pricing environment in North America. Our sodium chlorate business will benefit from strong pulp mill demand while the Brandon expansion drives increased cash flow and extends our position as a reliable, low-cost supplier to our customers. Chlor-alkali supply-demand fundamentals should support stable pricing."

"Our payout ratio for 2008 is expected to be between 80 and 85 per cent based on US/Canadian dollar exchange at parity. Total capital spending is expected to be $108.5 million which includes $83 million on TCP; $6 million on the Brandon expansion; $6.5 million on margin enhancing continuous improvement projects and $13 million on maintenance capital," said Mr. Kubera.



Statement of Distributable Cash

CAD thousands, except as noted Fourth
Quarter Year
2007 2007
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Canexus LP
Net Income 4,210 54,547
----------------------------
Charges and Credits to Income Not Involving
Cash:
Future Income Taxes 1,574 4,388
Amortization 11,566 44,370
Unrealized Gains on Currency Translation (4,456) (34,488)
Change in Fair Value of Foreign Exchange
Options 719 31
Change in Fair Value of Electricity Forward
Swaps 800 2,229
Other 3,400 3,952
----------------------------
13,603 20,482
----------------------------
Contributions to Defined Benefit Pension Plan (594) (2,370)
----------------------------
Expenditures on Asset Retirement Obligations (80) (616)
----------------------------
Purchase of Foreign Exchange Options - (360)
----------------------------
Changes in Non-Cash Operating Working Capital
and Due to Affiliates, Net 12,414 10,186
----------------------------
Cash From Operating Activities 29,553 81,869

Changes in Non-Cash Operating Working Capital
and Due to Affiliates, Net (12,414) (10,186)
Maintenance Capital Expenditures (3,744) (12,731)
Amortization of the Purchase Cost of Foreign
Exchange Options (179) (819)
Operating Non-Cash Items (2,133) (17)
----------------------------
Distributable Cash within Canexus LP 11,083 58,116
----------------------------
----------------------------

Canexus Income Fund
Share of Canexus LP's Distributable Cash 4,276 22,424
Trust Administration Expenses (66) (283)
----------------------------
Distributable Cash available to Canexus
Income Fund 4,210 22,141
----------------------------
----------------------------

Cash Distributions Declared 6,077 26,908
----------------------------
----------------------------

Payout Ratio 144% 122%
----------------------------
----------------------------


Fourth Quarter Results

Revenues were $103.3 million in the fourth quarter compared to $100.9 million in the same period last year as a result of strong demand in South America and higher sales volumes of chlor-alkali. Fourth quarter results were impacted by the Canadian dollar averaging above parity combined with disproportionately higher maintenance spending.

Cash distributions of $6.1 million were declared during the quarter, for a payout ratio of 144 per cent. On December 6, the Fund announced a change in the monthly distribution to unitholders. Beginning with the month ended December 31, 2007, the monthly cash distribution has been set at $0.0456 per unit which we believe is sustainable as we complete our TCP project.

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:

-- Annual sales revenue for the North American sodium chlorate segment increased 1.5 per cent to $192.2 million in 2007 from $189.4 million in 2006 due to higher realized selling prices offset by a two per cent decline in sales volumes. Price increases were partially eroded by the significant strengthening of the Canadian dollar in the second half of 2007. Gross margins increased to 28 per cent from 27 per cent primarily due to higher realized selling prices.

-- Fourth quarter sales revenue for this segment decreased three per cent to $47.8 million from $49.4 million in 2006 due to a decline in realized selling prices as a result of the impact of the stronger Canadian dollar (which strengthened from $0.88 CAD/USD in Q4/06 to $1.01 in Q4/07) and slightly lower sales volumes. Gross margins declined from 26 per cent to 25 per cent primarily as a result of lower realized selling prices.

-- The Brandon plant expansion project is complete with start-up on February 17, 2008. The $53-million expansion boosts plant capacity by approximately 12 per cent and will add approximately $10 million in operating cash flow annually. Brandon is the lowest-cost sodium chlorate plant in North America and the largest in the world. Brandon now provides debottlenecking opportunities that could add up to an additional 40,000 tonnes of capacity over the next 2 to 5 years.

-- Supply/demand remain tight and, as a result, we expect to see a net increase in prices of approximately 10 per cent per tonne commencing with Q1/08. With current market conditions and low inventories, we expect to run all our North American plants throughout 2008. However our strategy remains the same. Should market demand and pricing not support production at higher cost plants, we are prepared to rationalize this capacity.

- North America chlor-alkali:

-- Annual sales revenue for the North American chlor-alkali segment decreased 1.5 per cent to $130.7 million in 2007 from $132.8 million in 2006 due to the combination of a two per cent decrease in sales volumes and a three per cent decline in realized selling prices due to the strengthening of the Canadian dollar. Gross margins for the North American chlor-alkali business declined from 34 per cent to 29 per cent primarily due to reduced operating rates and increased costs of $5.9 million in the second quarter from unplanned outages and scheduled maintenance.

-- Fourth quarter sales revenue for this segment increased nine per cent to $32.2 million from $29.5 million from the same period last year due to a 10 per cent increase in sales volumes offset by a slight decline in realized selling prices. Gross margins increased to 29 per cent from 28 per cent as a result of a greater proportion of sales of caustic soda.

-- TCP at North Vancouver was approved by the Board of Directors on January 31, 2008. With an estimated cost of approximately $208 million, the project is expected to be completed in the first quarter of 2010. Project costs are expected to be funded through a combination of excess distributable cash, an increase in our current credit facility from $350 million to $450 million and through the DRIP. Project benefits include incremental annual operating cash flow of between $35 and $43 million as a result of decreased production costs and an increase in plant capacity.

-- Overall we expect MECU prices to stay flat or rise somewhat over most of 2008 as a result of competitor supply issues for caustic soda in the first quarter of 2008. We are currently evaluating hydrochloric acid capacity increases of 50,000 to 100,000 tonnes and could make a decision by mid-year.

- Brazil:

-- Annual sales revenue in Brazil increased nine per cent to $90.7 million for 2007 from $83.1 million for 2006. This increase is the result of higher realized selling prices for both sodium chlorate and chlor-alkali. The increases in average 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. Electricity costs and the purchase of caustic soda on the open market to supply our primary customer's increased demand contributed to this increase in costs resulting in gross margin percentages decreasing to 28 per cent from 29 per cent the prior year.

-- Fourth quarter sales revenue in Brazil increased six per cent to $23.3 million from $22.0 million from the same time last year primarily as a result of greater demand for caustic soda from our primary customer. Gross margin percentages decreased to 24 per cent from 31 per cent as a result of increased purchases of caustic soda for resale to our primary customer which attract no margin.

-- Canexus' Brazil operations are well-positioned to continue delivering strong results for 2008. In addition to a 2000 metric tonne sodium chlorate debottleneck expansion in 2008, future debottleneck options are being considered and the South American market is growing fast and a prime net importing region for caustic soda. South America remains a key investment region 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. Canexus is well-positioned to benefit from the growth and investment opportunities in South America.

Financial Updates

- Foreign exchange and Long-term debt:

-- Canadian dollar foreign exchange call options on US $5 million per month purchased on January 23, 2008 entitle Canexus LP to sell US dollars at a price of US $0.9709 per Canadian dollar from March 1, 2008 to May 31, 2008. Canadian dollar foreign exchange call options on US $5 million per month purchased in August 2007 entitle Canexus LP to sell US dollars at a price of US $0.9497 per Canadian dollar from September 5, 2007 to February 27, 2008.

-- All long-term debt (US$204 million at 12/31/07) is borrowed in US dollars as it acts as a natural hedge of our US dollar denominated business. The significant strengthening of the Canadian dollar in 2007 resulted in $32 million of unrealized foreign exchange translation gains which are included in other income as compared to an unrealized foreign exchange translation loss in 2006 of $0.4 million.

- Capital expenditures:

-- Capital expenditures for the year ended December 31, 2007 were $61.3 million as compared to the year ended December 31, 2006 of $27.4 million. This increase was primarily due to an increase in expansion capital expenditures of $37.9 million related to the expansion of our Brandon plant ($31.6 million) and to the technology conversion project at our North Vancouver plant ($6.3 million).

- Expenses and Other Income:

-- General and administrative expenses were as expected for 2007 with Canexus having transitioned all services previously provided by Nexen Inc. by the end of 2006.

-- Other income increased significantly in 2007 primarily as a result of the increase in unrealized foreign exchange translation gains on our long-term debt noted earlier; offset by the change in fair value of electricity forward swaps which ended in 2007 and movements in realized currency translation gains (losses) between years as a result of the significant weakening of the US dollar in 2007.

-- The provision for income taxes increased for the year ended December 31, 2007 primarily due to the reduction of income tax benefits in Brazil resulting from the strengthening of the Brazilian real relative to the US dollar.



Operating Results for the Three-Month periods and Years ended December 31,
2007 and 2006.

Three Months Ended Year Ended
December 31 December 31
------------------- -------------------
CAD thousands 2007 2006 2007 2006
-------------------------------------------------------- -------------------

Revenues
Sales 103,331 100,862 413,607 405,331
------------------- -------------------

Expenses
Cost of Goods Sold 76,469 73,013 295,725 285,716
Amortization 11,566 10,319 44,370 40,223
General and Administrative 7,466 7,746 30,186 26,942
Interest 2,374 2,827 11,377 10,713
------------------- -------------------
97,875 93,905 381,658 363,594
------------------- -------------------

Income before Other Income and
Income Taxes 5,456 6,957 31,949 41,737

Other Income (Other Expense) 994 (4,498) 29,482 6,195
------------------- -------------------

Income before Income Taxes 6,450 2,459 61,431 47,932
------------------- -------------------

Provision for Income Taxes
Current 666 115 2,496 634
Future 1,574 (1,450) 4,388 155
------------------- -------------------
2,240 (1,335) 6,884 789
------------------- -------------------

Net Income 4,210 3,794 54,547 47,143

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Average F/X Rate(CAD/US) 1.01 0.88 0.92 0.88
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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 3 p.m. ET on February 26, 2008, to discuss the results. Please call 416-644-3415 or 1-800-732-9307 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 March 4, 2008. To access the replay, call 416-640-1917 or 1-877-289-8525, followed by passcode 21263268#.

Non-GAAP measures

EBITDA, 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. Non-GAAP measures do not have standard meanings prescribed by GAAP and therefore are unlikely to be comparable to similar measures presented 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 year 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