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Press release from Marketwire

Canexus Income Fund Announces First Quarter Results

Wednesday, May 05, 2010

Canexus Income Fund Announces First Quarter Results21:10 EDT Wednesday, May 05, 2010CALGARY, ALBERTA--(Marketwire - May 5, 2010) - Canexus Income Fund (TSX:CUS.UN) (the "Fund") today announced its results for the first quarter ended March 31, 2010. Unless otherwise noted, the Fund is reporting the 100 percent results of Canexus Limited Partnership ("Canexus LP"), of which the Fund indirectly owns 34.9 percent. The Fund also issued a news release today announcing its intention to convert to a corporation in 2011 and to maintain distributions at the current amount of $0.5472 per unit annualized.Highlights:- Fund declared cash distributions of $4.7 million during first quarter, for a payout ratio of 83 percent, consistent with guidance- Six strategic growth projects on schedule for completion in the second and third quarters of 2010, expected to generate an incremental $50 million of operating cash flow on an annual basis; startup of the Technology Conversion Project (TCP) at our North Vancouver plant is scheduled for later this month and is expected to contribute an estimated $35-$43 million in incremental annual operating cash flow; startup of the 4,400MT sodium chlorate expansion, one of three projects in Brazil expected to contribute a total of $5 million of incremental operating cash flow per annum, is scheduled for tomorrow, May 6- North America sodium chlorate benefitted from stronger pulp markets, with improved volumes from previous quarter mostly offset by a decrease in realized selling prices; improving sodium chlorate industry operating rates expected to add to upward price momentum for remainder of 2010- North America chlor-alkali revenues increased from previous quarter due to stronger caustic soda demand from pulp producers partially offset by lower MECU realized selling prices due to seasonal softening in chlorine demand in Q1; caustic soda is being purchased for resale during the first half of 2010 to support higher contracted sales volumes in 2010 in preparation for the startup of the TCP- South America business unit generated gross margin of $8 million, up 16 percent from the previous quarter on higher chlor-alkali operating rates and chlorine sales volumes due to improved merchant market demand reflective of the economic recovery; March was a record production month- Completion of the project to build access for a second major rail line into our North American Terminal Operations (NATO) site at Bruderheim, Alberta is expected in the second quarter and should add $2 million of incremental operating cash flow annually- Call option contracts in place protect US$5 million per month at US$0.9302 from April 1 to June 30, 2010- On April 15, 2010, the Extendible Revolving Credit Facility increased to $440 million with maturity extended to August 18, 2012 and the US$20 million Senior Secured Revolving Credit Facility was repaid and cancelled; at March 31, 2010, total borrowings under committed credit facilities were $298 million with remaining available undrawn capacity of approximately $163 million."Our performance in the first quarter is on track with our expectations," said Gary Kubera, President and CEO. "As we stated in our December outlook, 2010 will be a year of two different halves, with the first half seeing our markets mending but still difficult, North American prices gradually recovering, a stronger Canadian dollar, and the effect of TCP transition and startup on Q2 results resulting in a payout ratio over 100 percent. In the second half we continue to look forward to improving market conditions, the benefits of our six key growth projects coming on stream and a return to lower payout ratios.""Results for North American sodium chlorate are consistent with our outlook, reflecting significant improvement in the global pulp market over the last year. Pulp prices have increased by nearly 50 percent from the low levels of mid-2009 based on both supply and demand dynamics, with further support from global inventories now standing at less than 25 days of supply. Chlorate industry operating rates have rebounded to around 90 percent and we believe that we have seen the bottom of the pricing cycle for chlorate as modest price increases were obtained for the second quarter. This trend is expected to continue with further increases expected for the balance of the year.""North American chlor-alkali is seeing improving volumes but lagging prices. Industry operating rates in March reached 90 percent, continuing a positive four-month trend. Prices appear to have stabilized at the end of the first quarter following a period of steady erosion, mostly in caustic soda. With chlor-alkali markets beginning to recover, we are excited to have initiated our final transition to the new TCP plant at North Vancouver. The old plant was shutdown last week following mechanical completion and the commissioning of 42 of 52 systems/subsystems of the new TCP plant. During the next three to four weeks, we expect to complete our final construction tie-ins, commission the remaining systems and begin our startup sequence. We have built product inventory and initiated commercial trades and purchases to supply customers during the transition. As startup proceeds, we expect first production in late May and to verify our design performance parameters during June and July. We look forward to the reduced costs and additional cash flow that TCP is expected to contribute.""Our Brazil business has had a great start to the year. Strong pulp markets and a solidly recovering economy in Brazil helped drive cash flow and significantly stronger margins compared to the first quarter last year. Our chlor-alkali facility ran at about 90 percent operating rates and chlorine and chlorine derivatives sales were strong during the quarter. Our growth projects in Brazil are expected to come on-stream in the second and third quarters, adding $5 million to our annual cash flow.""Our NATO business has made solid progress during its first year. We are nearing completion of the project to build access for a second major rail line into our Bruderheim site which will enhance both service and value for our customers. We continue to advance plans for the next development phase that will further validate the many advantages of the site.""Also, we confirmed today our intention to convert from an income trust to a corporation in 2011 and expect to maintain our distributions at current levels. As a corporation, we believe the competitive strengths and operating cash flow of our strategic business units can support current distributions in 2011 and beyond at an after-tax payout ratio of between 55 and 65 percent," said Mr. Kubera. Statement of Distributable Cash Three Months Ended March 31 CAD thousands, except as noted 2010 2009 ---------------------------------------------------------------------------- Canexus LP Net Income 16,141 5,749 Realized Foreign Exchange Losses on Cash 571 36 Charges and Credits to Income Not Involving Cash: Future Income Taxes (854) 1,993 Amortization 11,543 11,743 Unrealized (Gains) Losses on Currency Translation (7,344) 5,124 Change in Fair Value of Foreign Exchange Options 587 5,949 Change in Fair Value of Foreign Exchange Forward - 1,916 Change in Fair Value of Interest Rate Swaps 510 509 Accrual for Future TCP Severance Costs - (981) Other 1,066 1,629 ---------------------------------------------------------------------------- Total Charges and Credits to Income Not Involving Cash 5,508 27,882 ---------------------------------------------------------------------------- Contributions to / Payments for Defined Benefit Plans (570) (1) Interest Income on Restricted Investments (1) (163) Expenditures on Asset Retirement Obligations (25) (33) Changes in Non-Cash Operating Working Capital and Due to/from Affiliates 2,416 (4,748) ---------------------------------------------------------------------------- Cash From Operating Activities 24,040 28,722 Changes in Non-Cash Operating Working Capital and Due to/from Affiliates (2,416) 4,748 Maintenance Capital Expenditures (2,440) (3,111) Amortization of the Purchase Cost of Foreign Exchange Options (1,057) (1,253) Realized Foreign Exchange Losses on Cash (571) (36) Operating Non-Cash Items (644) (1,595) ---------------------------------------------------------------------------- Distributable Cash within Canexus LP (1) 16,912 27,475 ---------------------------------------------------------------------------- Canexus Income Fund Share of Canexus LP's Distributable Cash 5,823 9,848 Trust Administration Expenses (175) (111) ---------------------------------------------------------------------------- Distributable Cash available to Canexus Income Fund (1) 5,648 9,737 ---------------------------------------------------------------------------- Cash Distributions Declared 4,704 4,500 ---------------------------------------------------------------------------- Payout Ratio (1) 83% 46% ---------------------------------------------------------------------------- Note: (1) See comments concerning non-GAAP Measures at end of release. Operations HighlightsCanexus 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 compared to the same period in 2009 decreased seven percent to $52.9 million from $57.2 million due to a 20 percent decrease in realized selling prices partially offset by a 12 percent increase in sales volumes. The decrease in realized selling prices was due to somewhat lower delivered selling prices and the stronger Canadian dollar in the first quarter of 2010 (US $0.95) as compared to the first quarter of 2009 (US $0.81). The increase in sales volumes was due to increased operating rates at customer facilities as the global economy continues to recover from the recession. The gross margin percentage decreased to 32 percent from 41 percent due to the decrease in realized selling prices partially offset by lower fixed costs and higher production volumes.-- First quarter sales revenue for this segment compared to the fourth quarter of 2009 increased one percent to $52.9 million from $52.5 million due to a four percent increase in sales volumes which was mostly offset by a decrease in realized selling prices. The increase in sales volumes was due to increased operating rates at customer facilities as the global economy continues to recover from the recession. The decrease in realized selling prices was due to lower demand at the time contracts were being renegotiated as a result of the economic downturn. The gross margin percentage increased to 32 percent from 29 percent due to lower fixed costs and higher production partially offset by the decrease in realized selling prices. Fixed costs were higher in the fourth quarter of 2009 due to higher maintenance expenses as a result of planned maintenance shutdowns at all three of our North American sodium chlorate facilities during the fourth quarter.-- In conjunction with the strengthening of global pulp markets, North America sodium chlorate operating rates improved in the first quarter of 2010 and price increases have been announced. Modest price increases are being realized for second quarter 2010 shipments as a result of the first quarter price announcements. Pulp mill restarts are a possibility; both sodium chlorate demand and industry operating rates are expected to increase in the second half of 2010 as a result. Continued improvement in operating rates is expected to strengthen upward price momentum in the second half of 2010.- North America Chlor-alkali:-- First quarter sales revenue for this segment compared to the same period in 2009 decreased 13 percent to $37.1 million from $42.4 million primarily due to lower MECU realized selling prices and lower hydrochloric acid sales volumes partially offset by higher caustic soda sales volumes. The increase in caustic soda sales volumes was due to improved demand from pulp producers. Lower hydrochloric acid sales volumes and lower MECU realized selling prices were due to excess capacity in the market resulting from the economic downturn. North America chlor-alkali industry operating rates improved to 90 percent in March. The gross margin percentage decreased to 18 percent from 42 percent primarily due to lower realized MECU selling prices, partially offset by lower electricity and natural gas prices, and lower fixed costs.-- First quarter sales revenue for this segment compared to the fourth quarter of 2009 increased eight percent to $37.1 million from $34.3 million primarily due to higher caustic soda sales volumes partially offset by lower chlorine sales volumes and realized selling prices and slightly lower caustic soda realized selling prices. The increase in caustic soda sales volumes was due to improved demand from pulp producers. Lower chlorine sales volumes and realized selling prices were due to the normal seasonal softening in chlorine demand. The gross margin percentage decreased to 18 percent from 20 percent due to lower realized MECU selling prices, lower production volumes and to caustic soda purchases for resale. Caustic soda is being purchased for resale during the first half of 2010 in preparation for startup of the TCP.-- Our hydrochloric acid project at North Vancouver to increase acid capacity by 70,000 tonnes is on track for startup in July and is expected to add $2 million of operating cash flow annually.-- Industry operating rates improved to 85 percent of capacity in the first quarter of 2010, as compared to 78 percent in the prior quarter and 69 percent in the first quarter of 2009. Our North Vancouver chlor-alkali plant's operating rate was 92 percent in the first quarter of 2010. In spite of otherwise steady demand for hydrochloric acid, the supply/demand balance weakened due to additional byproduct supply. Caustic soda demand improved moderately as a result of increasing demand from pulp producers and inventories declined to more sustainable levels. MECU prices are expected to remain flat in the second quarter of 2010 with modest gains in the second half of 2010 on the strength of continued caustic soda price improvement.- South America:-- First quarter sales revenue for this segment compared to the same period in 2009 decreased two percent to $23.7 million from $24.2 million primarily as a result of lower caustic soda and sodium chlorate sales volumes and lower caustic soda realized selling prices partially offset by higher chlorine sales volumes. The decrease in sodium chlorate sales volumes was due to reduced demand from our primary customer in January and February. The increase in chlorine sales volumes was due to improved demand in the merchant market reflective of the economic recovery. Lower caustic soda realized selling prices were primarily due to the stronger Canadian dollar in the first quarter of 2010 (US $0.95) versus the first quarter of 2009 (US $0.81). The gross margin percentage increased to 34 percent from 19 percent due to lower fixed costs and higher production. Absolute gross margin was $8 million as compared to $4.6 million in the first quarter of 2009. A plant maintenance shutdown in 2009 and the purchase of caustic soda up to our chlor-alkali plant's operating capacity volume at market prices, which were higher than the price we could bill our primary customer, contributed to lower gross margin in 2009.-- First quarter sales revenue for this segment was consistent with the fourth quarter of 2009. Higher chlorine sales volumes and realized hydrochloric acid selling prices were offset by lower sodium chlorate and caustic soda sales volumes and lower chlorine realized selling prices. The decrease in caustic soda and sodium chlorate sales volumes were due to reduced demand from our primary customer in January and February. The increase in chlorine sales volumes was due to improved demand in the merchant market reflective of the economic recovery. The gross margin percentage increased to 34 percent from 29 percent due to higher realized hydrochloric acid selling prices and higher chlor-alkali production, partially offset by slightly lower sodium chlorate production.-- The 4,400 MT sodium chlorate expansion is set for startup on May 6 and the project to sell excess hydrogen is expected to startup during the second quarter; our Brazil hydrochloric acid expansion project is expected to startup in August 2010 supported by a 10-year hydrochloric acid contract.-- Demand for Brazilian-produced pulp continues to be strong, driven primarily by exports and the supply disruption at earthquake-curtailed Chilean mills. Canexus Brazil's major customer, Fibria, operated their mill at near capacity rates at the end of the first quarter. Accordingly, March was a record production month for both Fibria and Canexus Brazil. Fibria's production rate is projected to remain high for the balance of the year, which will support strong operating rates for Canexus Brazil. Increased chlorine production in the first quarter supported by improved merchant market demand, is reflective of the economic recovery with strong chlor-alkali operating rates projected for the remainder of 2010.Technology Conversion Project (TCP) UpdateThe TCP at the North Vancouver chlor-alkali facility is expected to contribute an estimated $35-$43 million in incremental annual operating cash flow commencing in the second quarter of this year. Sixty percent of the project value is generated by established cost savings from reduced expenses for electricity, staffing and maintenance. The current status and outlook for TCP includes:- Mechanical completion on April 23, 2010- 42 of 52 systems/sub-systems commissioned prior to shutdown- Old plant shutdown on April 30, 2010- During the next three to four weeks, we expect to complete our final construction tie-ins, commission the remaining systems and begin our startup sequence- TCP spending at March 31, 2010, was $239 million. The projected final total cost for TCP continues to be approximately $270 million. With 60 percent of the project benefits coming from established cost savings, we have a high degree of confidence in the TCP benefits.Financial Updates- Foreign Exchange and Long-Term Debt:-- Foreign exchange call option contract in place to sell US$5 million per month and acquire Canadian dollars at a price of US$0.9302 from April 1 to June 30, 2010.-- In the first quarter, mark-to-market fair value losses of $0.6 million and realized gains of $0.7 million were recorded on foreign exchange call option contracts for a net gain of $0.1 million.-- We borrow in US dollars, which creates unrealized currency translation gains as the Canadian dollar strengthens. A substantial portion of our revenues are denominated in or referenced to the US dollar and are protected with call option contracts as noted above. During the first quarter of 2010, we recorded an unrealized currency translation gain of $8.6 million on our US dollar denominated long-term debt, compared to an unrealized currency translation loss of $7.7 million in the same period in 2009.-- Effective April 15, 2010, Canexus LP's Extendible Revolving Credit Facility increased from $420 million to $440 million and its US$20 million Senior Secured Revolving Credit Facility has been repaid and cancelled. Maturity of Canexus LP's senior secured credit facilities (which now includes the $440 million Extendible Revolving Credit Facility and the US$10 million EDC Extendible Revolving Credit Facility) has been extended to August 18, 2012.-- On August 31, 2009, the Fund issued $86 million of convertible unsecured subordinated debentures which mature December 31, 2014. The debentures bear interest at 8 percent payable semi-annually in arrears on June 30 and December 31 of each year. As at March 31, 2010, $4.5 million of the debentures had converted.-- Total borrowings under our committed credit facilities at March 31, 2010, were $298 million with remaining available undrawn capacity of approximately $163 million. We have no debt maturing before August 2012. At March 31, 2010, Canexus had cash on hand of $2.4 million.- Capital Expenditures: Capital expenditures for the three months ended March 31, 2010, were $48.6 million of which $45 million was spent on expansion projects. Expansion capital expenditures related to the TCP and the hydrochloric acid growth projects at North Vancouver, the NATO hydrocarbon transloading projects and the sodium chlorate expansion, hydrogen and hydrochloric acid growth projects at our Brazil plant.- Expenses and Other Income: For the first quarter of 2010, general and administrative expense decreased by $0.9 million compared to the same period of 2009 primarily due to lower SAP chemicals best practice review and implementation costs and lower bonus amounts.-- 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) on a mark-to-market basis. In the first quarter of 2010, we recorded fair value losses of $0.5 million on interest rate swaps and realized losses of $0.4 million for a total loss of $0.9 million.-- Income taxes decreased by $1.7 million for the first quarter of 2010 as compared to the same period in 2009, due to timing differences partially offset by higher current taxes in Brazil. At March 31, 2010, Canexus LP has approximately $387 million of future tax deductions resulting from capital expenditures which can be used to shelter future taxable income. Operating Results for the Three-Month Periods Ended March 31, 2010 and 2009 CAD thousands (Unaudited) 2010 2009 ---------------------------------------------------------------------------- Revenues Sales 113,715 123,819 Expenses Cost of Goods Sold 81,805 77,801 Amortization 11,543 11,743 General and Administrative 8,331 9,260 Interest 1,571 2,208 ---------------------------------------------------------------------------- 103,250 101,012 ---------------------------------------------------------------------------- Income before Other Income (Expense) and Income Taxes 10,465 22,807 Other Income (Expense) 6,126 (14,864) ---------------------------------------------------------------------------- Income before Income Taxes 16,591 7,943 ---------------------------------------------------------------------------- Provision for (Recovery of) Income Taxes Current 1,304 201 Future (854) 1,993 ---------------------------------------------------------------------------- 450 2,194 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net Income 16,141 5,749 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Financial Statements, Conference Call and WebcastFinancial Statements and Management's Discussion and Analysis will be posted on the Canexus web site at www.canexus.ca and filed on SEDAR when available. Management will host a conference call at 4 p.m. ET on May 6, 2010, to discuss the results. Please call 416-644-3422 or 1-877-974-0448. The conference call will also be accessible via webcast at www.canexus.ca. A replay of the conference call will be available until midnight May 13, 2010. To access the replay, call 416-640-1917 or 1-877-289-8525, followed by passcode 4289311#.Non-GAAP MeasuresGross margin, gross margin percentage, payout ratio, distributable cash and operating cash flow 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 StatementsThis 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 pricing for sodium chlorate and chlor-alkali products, expected volumes of and demand for sodium chlorate or chlor-alkali products, expected currency exchange rates, the Fund's expected payout ratio, global caustic soda demand, expectations for MECU prices, expectations regarding North Vancouver facility operations, the timing of TCP completion, the expenses related thereto and its contribution to operating cash flow, the timing of completion and contribution to operating cash flow of growth projects, including the Brazil sodium chlorate and hydrochloric acid expansions, North Vancouver hydrochloric acid project and NATO rail infrastructure project and available tax deductions. Investors should be cautioned that any decision to pay dividends following the conversion to a corporation will be made by the board of directors of Canexus on the basis of Canexus' earnings, financial requirements and other conditions existing at such future time. 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 CanexusCanexus 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 also provides fee-for-service hydrocarbon transloading services to the oil and gas industry from its terminal at Bruderheim, Alberta. Canexus targets opportunities to maximize unitholder returns and delivers high-quality products and services to its customers. Canexus units and convertible debentures trade on the Toronto Stock Exchange under the symbol CUS. More information about Canexus is available at www.canexus.ca.FOR FURTHER INFORMATION PLEASE CONTACT: Canexus Limited Gary Kubera President and CEO (403) 571-7300 or Canexus Limited Richard McLellan CFO (403) 571-7300 www.canexus.ca