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Press release from Marketwire

Canexus Corporation Announces First Quarter Results

Canexus Establishes All-Time Record Quarterly Cash Operating Profit and Announces Approval of Key Growth Initiatives

Tuesday, May 08, 2012

Canexus Corporation Announces First Quarter Results20:03 EDT Tuesday, May 08, 2012CALGARY, ALBERTA--(Marketwire - May 8, 2012) - Canexus Corporation (TSX:CUS) (the "Corporation" or "Canexus") today announced its financial results for the first quarter ended March 31, 2012. Highlights:Canexus delivered an all-time record for cash operating profit in the first quarter of $40.3 million, a 10% increase over Q4 2011 and 87% higher than Q1 2011. Distributable cash was $27.3 million ($0.23 per share) for the three months ended March 31, 2012, resulting in a payout ratio of 60%. Today, the Board of Directors approved a second expansion of the Corporation's hydrochloric acid capacity at its North Vancouver chlor-alkali facility, which will add an additional 110,000 wet metric tonnes ("WMT") for start-up late in the third quarter of 2013. This will add to the 110,000 WMT expansion announced on December 15, 2011, increasing our total hydrochloric acid capacity to 370,000 WMT's. The expected cost of the combined expansions is $44.3 million and they should contribute $20.0 million of incremental operating cash flow annually at an average system capacity utilization of 86%. The Board also approved projects to enhance the infrastructure at our North America Terminal Operations ("NATO") business unit to increase acid transload capacity and to add acid blending capacity at the site. These NATO projects are expected to cost $9.2 million and should deliver $6.5 million of incremental operating cash flow annually once they ramp up to capacity. The Board of Directors further approved a $30.0 million project at NATO to increase crude oil and diluted bitumen transloading capacity to 35,000 bbls/day by Q4 2012 (from current capacity of 7,500 bbls/day). New business supported by this project is expected to generate $14.0 million of incremental operating cash flow annually at capacity. Additionally, Canexus announced today that it has entered into a Letter of Understanding with MEG Energy Corp. to connect the Canexus Bruderheim Terminal (NATO) with the MEG Energy Stonefell Terminal and potentially with other pipeline systems in the area, for the purposes of loading bitumen blend for railcar shipments and receiving diluent shipments by rail. Canexus expects definitive agreements to be completed in the coming months. The Board has authorized spending of up to $20.0 million on detailed engineering and for ordering long lead time items related to pipeline readiness. Effective April 16, 2012, the Corporation's Extendible Revolving Credit Facility was increased from $440 million to $500 million and was extended to June 30, 2016. Canexus is now benefiting from lower borrowing costs by 100bps. We expect to be able to fund the growth projects announced today from cash on hand, excess distributable cash, DRIP proceeds and committed credit facilities. The Board declared the regular quarterly dividend of $0.1368 per common share payable July 16, 2012 to shareholders of record on June 30, 2012. "The first quarter of 2012 saw Canexus achieve an all-time record cash operating profit, demonstrating the value of the investments we have made to enhance our business and drive our low cost structure," said Gary Kubera, President and CEO. "All three of our business units turned in a strong performance and I am particularly pleased to announce the next phase of exciting growth opportunities for Canexus. We remain committed to drive future growth while delivering sustainable returns to our shareholders. Our second quarter results will reflect planned maintenance shutdowns at several facilities, including the North Vancouver chlor-alkali facility that was down for two weeks in April. Overall, we are on track to meet our full year guidance." To facilitate a meaningful analysis and discussion of the Corporation's financial performance for the three months ended March 31, 2012, the following financial information for the three months ended March 31, 2011 has been prepared on a proforma basis to include the 100% financial results of Canexus Limited Partnership ("Canexus LP") for the period January 1, 2011 to February 6, 2011. On February 7, 2011, the Corporation's predecessor, Canexus Income Fund, indirectly acquired Nexen Inc.'s interest in Canexus LP and Canexus Income Fund consolidated the 100% financial results of Canexus LP from that date.Distributable Cash Distributable cash of Canexus Corporation was $27.3 million ($0.23 per share) for the quarter resulting in a payout ratio of 60%. Three Months Ended March 31CAD thousands20122011Cash Operating Profit40,29521,553Interest Expense(5,670)(6,229)Realized Currency Translation Gains (Losses)39(80)Maintenance Capital Expenditures(4,054)(3,684)Provision for Current Income Taxes(1,912)(1,134)TCP Severance Costs Paid(888)(1,567)Other(498)210Distributable Cash27,3129,069Distributable Cash Per Share$0.23$0.08Dividends Declared Per Share$0.1368$0.1368Payout Ratio60%173%Below is a reconciliation of net cash generated from operating activities to Distributable Cash of the Corporation for the three months ended March 31, 2012 and 2011.Three Months Ended March 31CAD thousands20122011Net Cash Generated from Operating Activities14,55215,486Changes in Non-Cash Operating Working Capital18,9691,801Non-Cash Change in Income Tax Payable & Interest Payable(1,631)(2,276)Interest Income5794Maintenance Capital Expenditures(4,054)(3,684)Realized Foreign Currency Translation Gains (Losses) on Cash35(141)TCP Severance Costs Paid(888)(1,567)Amortization of the Purchase Cost of Foreign Exchange Options(378)(211)Expenditures on Decommissioning Liabilities(136)2Operating Non-Cash Items786(435)Distributable Cash27,3129,069Segmented Information for the Three-Month Periods Ended March 31, 2012 and 2011Canexus has a total of six manufacturing plants - four in Canada and two at one site in Brazil - organized into three business units. Canexus also provides fee-for-service hydrocarbon transloading at its terminal in Alberta. NATO results are included in the North America Chlor-alkali results. Below is our first quarter performance by segment.CAD thousands, except as notedNorth AmericaThree Months Ended March 31, 2012Sodium ChlorateChlor-alkaliSouth AmericaOtherTotalSales Revenue59,81861,25627,904-148,978Cost of Sales34,03934,40421,51115590,109Distribution, Selling and Marketing6,91013,18135469121,136General and Administrative (1)2,7563,4939522,2629,463Operating Profit (Loss)16,11310,1785,087(3,108)28,270Add:Depreciation and Amortization included in Cost of Sales3,1835,9341,722-10,839Depreciation and Amortization included in General and Administrative--14221235Share-based Compensation Expense---951951Cash Operating Profit (Loss)19,29616,1126,823(1,936)40,295Cash Operating Profit Percentage32%26%24%27%CAD thousands, except as notedNorth AmericaThree Months Ended March 31, 2011Sodium ChlorateChlor-alkaliSouth AmericaOtherTotalSales Revenue54,67743,33827,961-125,976Cost of Sales32,94533,17721,09617487,392Distribution, Selling and Marketing7,16012,54033954220,581General and Administrative (1)2,0842,6411,1053,0898,919Operating Profit (Loss)12,488(5,020)5,421(3,805)9,084Add:Depreciation and Amortization included in Cost of Sales3,5135,7811,458-10,752Depreciation and Amortization included in General and Administrative---253253Share-based Compensation Expense---1,4641,464Cash Operating Profit (Loss)16,0017616,879(2,088)21,553Cash Operating Profit Percentage29%2%25%17%(1)General and administrative expenses are for functional areas such as human resources, finance, information technology and legal and are allocated to the operating segments based on production volumes.Business Unit HighlightsNorth America Sodium Chlorate:Q1 2012 versus Q4 2011: Sales revenue for the North America sodium chlorate segment increased 3% to $59.8 million for the three months ended March 31, 2012 from $58.3 million for the three months ended December 31, 2011. Sales volumes increased 2% and realized delivered prices increased 1% for the three months ended March 31, 2012. Cash Operating Profit Percentage increased from 29% to 32% as a result of higher realized selling prices, lower salt costs due to lower transportation costs and lower fixed costs primarily as a result of lower maintenance costs for the three months ended March 31, 2012. Q1 2012 versus Q1 2011: Sales revenue for the North America sodium chlorate segment increased 9% to $59.8 million for the three months ended March 31, 2012 from $54.7 million for the three months ended March 31, 2011. Sales volumes increased 2% as compared to the same period in 2011. Realized netback prices increased 8% over the three months ended March 31, 2011 and were positively affected by the weaker Canadian dollar (three months ended March 31, 2012 - US $0.99 as compared to US $1.00 for the three months ended March 31, 2011). Cash Operating Profit Percentage increased to 32% for the three months ended March 31, 2012 compared to 29% for the three months ended March 31, 2011 as a result of higher realized netback prices, lower salt costs and slightly higher production volumes, partially offset by slightly higher electricity costs and higher fixed costs. North America Chlor-alkali:Q1 2012 versus Q4 2011: Sales revenue for the North America chlor-alkali segment increased 4% to $61.3 million for the three months ended March 31, 2012 from $59.2 million for the three months ended December 31, 2011. The increase in sales revenue was primarily due to higher hydrochloric acid (75%) and caustic soda (7%) realized netback prices, partially offset by lower sales volumes of all products and lower realized netback prices for chlorine. Cash Operating Profit Percentage decreased by 1% to 26% for the three months ended March 31, 2012 with higher MECU realized netback prices being offset by slightly higher electricity costs per unit of production, 3% higher fixed costs as a result of higher maintenance costs, and lower production volumes due to an unplanned shutdown in January and to manage chlorine inventories. Q1 2012 versus Q1 2011: Sales revenue for the North America chlor-alkali segment increased 41% to $61.3 million for the three months ended March 31, 2012 from $43.3 million for the three months ended March 31, 2011 due to higher sales volumes of hydrochloric acid (34%) and caustic soda (14%) and higher realized netback prices for hydrochloric acid (105%) and caustic soda (37%), partially offset by lower sales volumes (10%) and realized netback prices (55%) for chlorine. Cash Operating Profit increased from $0.8 million for the three months ended March 31, 2011 to $16.1 million for the three months ended March 31, 2012 primarily as a result of higher MECU realized netback prices, lower fixed costs and higher production volumes (18%), partially offset by higher electricity costs. Fixed costs were lower and production volumes higher as the plant was shutdown for planned maintenance in March 2011. The hydrochloric acid expansion announced on December 15, 2011 is on track for commissioning and start-up in January 2013. We took advantage of the planned maintenance shutdown at the North Vancouver facility in April to complete work required for commissioning and start-up in January 2013 without the need for further plant downtime. The second expansion announced today is scheduled for commissioning and start-up in September 2013. The expected cost of the combined expansions of $44.3 million includes $6 million for expansion of railcar storage capacity at the Bruderheim NATO site and key infrastructure upgrades at the North Vancouver facility, that are sufficiently sized to accommodate future expansion should the market justify another capacity expansion. South America:Q1 2012 versus Q4 2011: Sales revenue for the South America segment increased 6% to $27.9 million for the three months ended March 31, 2012 from $26.3 million for the three months ended December 31, 2011. Cash Operating Profit increased from $5.6 million for the three months ended December 31, 2011 to $6.8 million for the three months ended March 31, 2012 primarily as a result of higher sales volumes of sodium chlorate (4%), caustic soda (4%), chlorine (10%) and sodium hypochlorite (6%) and lower fixed costs more than offsetting higher salt costs as a result of a delayed shipment. Q1 2012 versus Q1 2011: Sales revenue for the South America segment was consistent for the three months ended March 31, 2012 and March 31, 2011. Lower sales volumes of sodium chlorate (3%), caustic soda (2%), chlorine (10%) and sodium hypochlorite (8%) were offset by higher sales volumes and realized netback prices for hydrochloric acid (10 and 15% respectively) and higher realized netback prices for caustic soda (4%). Cash Operating Profit was consistent for the three months ended March 31, 2012 and March 31, 2011 with higher sales volumes and realized netback prices for hydrochloric acid and lower fixed costs offsetting lower sodium chlorate, caustic soda, chlorine and sodium hypochlorite sales volumes and higher salt costs. Market Fundamentals North America Sodium Chlorate: Following a slow down in the second half of 2011, the global pulp market began to recover in the first quarter of 2012. Despite some softness in January of this year (with a few select producers taking market related downtime), current industry metrics suggest the markets are stabilizing and are pointing towards a general strengthening of the pulp industry. Producer inventories have decreased from their October 2011 peak of 39 days to 31 days at the end of March 2012, much closer to the historical levels that support price increases. Benchmark market pulp prices for NBSK and hardwood have increased $30 and $40 per air-dried metric tonne (April) respectively, from fourth quarter trough levels. Global pulp shipments are up by 2.1% year-over-year for the first three months, with sustained demand coming from China. We expect these current conditions to generally remain in place through most of the year. Demand for sodium chlorate in North America for the first quarter of 2012 was only modestly impacted by the January pulp softness. However, industry operating issues resulting in lower production held industry operating rates near 95% for the entire quarter. Sodium chlorate exports from North America closed the year 2011 at a high of 170,000 MT, an all time record for the North American industry. For the remainder of 2012, operating rates are projected to settle around the 96% level. North America Chlor-alkali: The North American chlor-alkali industry operated at an estimated 85% of capacity in the first quarter of 2012 compared with 78% in the prior quarter and 90% in the first quarter of 2011. The increase in industry capacity utilization compared to the prior quarter was greater than expected due to inventory restocking of MDI/TDI and stronger PVC exports to China. Declining prices for natural gas have increased the cost advantage of US production versus Asia.North American hydrochloric acid production increased in the first quarter of 2012 due to higher operating rates for by-product supply (MDI/TDI/Fluorocarbon). Demand for oil and gas well fracturing weakened with reduced drilling activity for natural gas in the US and an early spring break up in Western Canada. This reduction in demand from oil and gas was partially offset by stronger demand in other segments.North America caustic soda production increased in the first quarter of 2012 consistent with higher chlorine operating rates. Demand increased in the first quarter from most consumers, including the largest consuming segment, pulp and paper. Demand growth was slightly less than the production increase resulting in higher inventories at producers/terminals.MECU prices increased during the first quarter of 2012 due to improvements in caustic soda and hydrochloric acid prices partially offset by a decline in chlorine prices. South America: Brazilian pulp exports were stable during the first quarter of 2012 primarily due to pulp restocking in Europe and China offset by weaker demand in the US and the rest of Asia. Higher pulp exports in March provide an indication of lower producer inventories and a potential price increase for April.Canexus Brazil's major sodium chlorate customer had slightly lower chlorate demand than expected. Canexus Brazil's sodium chlorate plant operated close to planned capacity in the first quarter of 2012.In the first quarter, the Brazilian chlor-alkali capacity utilization rate was 86% (12% higher than the same period in 2011). Industry production rates were lower in 2011 due to power outages and planned outages at several chlor-alkali facilities during the year. Canexus Brazil's chlor-alkali capacity utilization was 96% during the first quarter. The key driver was higher hydrochloric acid sales as result of lower by-product acid availability in north eastern Brazil due to the shutdown of a TDI facility in the region.Western Canadian Oil and Gas: Global crude oil markets remain strong and elevated prices have been sustained over the course of the past three months. Price differentials between Western Canadian grades and other key benchmarks have remained wide due to several channel-to-market issues, including oversupply of oil in mid-continent North American markets. This trend has stimulated ongoing demand for oil transportation services by rail.Financial Updates Long-term Debt and Finance Income (Expense): 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. During the first quarter of 2012, we recorded an unrealized currency translation gain of $4.8 million as a result of the strengthening of the Canadian dollar at the end of the quarter compared to the end of Q4 2011 (Q1/11 - $7.2 million unrealized gain). These amounts are included in finance income (expense). Interest expense in the quarter was $5.7 million (Q1/11 - $6.2 million). Interest capitalized on major projects was $0.2 million in Q1 2012 ($0.1 million in Q1/11). We recorded mark-to-market changes in fair value of convertible debentures of $9.7 million (losses) in Q1 2012 ($0.4 million loss in Q1/11). Other Income (Expense):In the first quarter, mark-to-market fair value losses of $0.3 million (Q1/11 - $0.4 million losses) and realized gains of $0.4 million (Q1/11 - $0.5 million gains) were recorded on foreign exchange option contracts. In the first quarter of 2012, we recorded mark-to-market fair value gains of $0.3 million (Q1/11 - $0.4 million gains) on interest rate swaps and realized losses of $0.3 million (Q1/11 - $0.4 million losses). In the first quarter we recorded mark-to-market fair value gains on a cross currency swap of $0.2 million as a result of the strengthening of the Canadian dollar at the end of the quarter compared to the end of Q4 2011. In Q3 2011 we entered into a cross currency swap to effect the payment of interest on the Series IV Convertible Debentures issued on June 30, 2011 in US dollars. Capital Expenditures: Capital expenditures for the three months ended March 31, 2012 were $21.4 million, of which $4.1 million was spent on maintenance projects and the balance on continuous improvement ($2.4 million) and expansion projects ($14.9 million). Expansion capital was spent on the continued development of our NATO site, the rail yard and hydrochloric acid expansions at our North Vancouver facility and the power line upgrade at our Brandon plant. Provision for Income Taxes: The provision for income taxes is higher in the first quarter of 2012, as compared to the same period in 2011, due to higher earnings in foreign subsidiaries. As of March 31, 2012, Canexus has approximately $452 million of future tax deductions resulting predominantly from capital expenditures which can be used to shelter future taxable income in Canada. Liquidity: As of March 31, 2012, total borrowings under committed credit facilities were $292.8 million with remaining available undrawn capacity of approximately $207 million. Cash on hand at March 31, 2012 was $2.0 million. Our debt-to-EBITDA ratio is 2.05 times (3.0 times inclusive of convertible debentures) which is within our stated target range. Operating Results for the Three Months Ended March 31, 2012 and 2011Three Months Ended March 3120122011Sales Revenue148,978125,976Cost of Sales (1)90,10987,392Gross Profit58,86938,584Distribution, Selling and Marketing21,13620,581General and Administrative (2)9,4638,919Operating Profit28,2709,084Finance Expense(11,676)(392)Income before Other Income and Income Taxes16,5948,692Other Income39130Income before Income Taxes16,9858,722Provision for Income TaxesCurrent1,9121,134Deferred4,8162,5006,7283,634Net Income10,2575,088Notes: (1)Depreciation and amortization included for the three months ended March 31, 2012 - $10.8 million; depreciation and amortization included for the three months ended March 31, 2011 of $10.8 million. (2)Depreciation and amortization included for the three months ended March 31, 2012 - $0.2 million; depreciation and amortization included for the three months ended March 31, 2011 of $0.3 million.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 and filed on SEDAR when available. Management will host a conference call at 4:00 p.m. ET on May 9, 2012, to discuss the results. A Q1 2012 presentation will be available on our website to facilitate the conference call. Please dial 416-644-3414 or 1-800-814-4859. 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 16, 2012. To access the replay, call 416-640-1917 or 1-877-289-8525, followed by passcode 4533337#.Non-GAAP Measures Cash operating profit, cash operating profit percentage, payout ratio, distributable cash and gross profit are non-GAAP financial measures, but management believes they are useful in measuring the Corporation'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 Corporation's performance or as a measure of the Corporation's liquidity and cash flow. The Corporation's method of calculating non-GAAP measures may differ from the methods used by other issuers and accordingly, the Corporation's non-GAAP measures are unlikely to be comparable to similarly titled measures used by other issuers. Readers should consult the Corporation's 2011 MD&A filed on SEDAR for a complete explanation of how the Corporation calculates each such non-GAAP measure.Forward-Looking Statements This news release contains forward-looking statements and information relating to expected future events relating to Canexus and its subsidiaries, including with respect to the timing of completion of the current and planned second hydrochloric acid expansion, including the costs thereof, the potential volumes associated therewith and the anticipated incremental operating cash flow to be derived therefrom, Canexus' corporate performance, pulp market stabilization and recovery, sodium chlorate demand and industry operating rates and its impact on price momentum, the anticipated costs associated with increasing transload capacity and acid blending capacity at NATO and the anticipated incremental operating cash flow to be derived therefrom, expectations in relation to contractual relations with MEG and expectations with respect to Canexus' ability, and sources of capital, to finance its growth projects. 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 Corporation's Annual Information Form filed on the Corporation'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, Canexus disclaims 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 two at one site 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 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 shareholder returns and delivers high-quality products to its customers. Canexus' common shares (CUS) and debentures (Series I - CUS.DB; Series III - CUS.DB.A; Series IV - CUS.DB.B) trade on the Toronto Stock Exchange. More information about Canexus is available at www.canexus.ca.FOR FURTHER INFORMATION PLEASE CONTACT: Gary KuberaCanexus CorporationPresident and CEO(403) 571-7300ORRichard McLellanCanexus CorporationCFO(403) 571-7300www.canexus.ca