Canexus reports Q2 net earnings of C$11.8M compared to 2010 loss of C$16.5M; revenues up 25% to C$130.5M on higher sodium chlorate volumes and new chlor-alkai facility
July 28, 2011
– Canexus Corporation (TSX:CUS) (the "Corporation" or "Canexus") today announced the second quarter ended June 30, 2011 financial results for its predecessor, Canexus Income Fund (the "Fund"). Unless otherwise noted, the Corporation is reporting the 100% results of Canexus Limited Partnership ("Canexus LP").
-- The Board of Directors of Canexus declared the regular quarterly dividend of $0.1368 per common share payable October 17, 2011 to shareholders of record on September 30, 2011.
-- Canexus LP recorded cash operating profit for the second quarter of $29.0 million, the upper end of our guidance for the quarter, which was $25 - $30 million, resulting in a payout ratio of 77%. Our guidance for Q3 of $35 - $40 million and Q4 of $30 - $35 million is unchanged.
-- North America sodium chlorate sales volumes increased 3% over Q2 2010 and were lower than Q1 2011 by 2% (1,700 metric tonnes ("MT")). We lost 3,600 MT's of sodium chlorate production in June at our Brandon plant as a result of severe weather which affected Manitoba Hydro equipment. All of our sodium chlorate plants are now running at capacity which is
expected to continue through 2011 and into 2012. Realized netback prices, despite being negatively affected by the stronger Canadian dollar relative to the US dollar (Q2/11 - US$1.03; Q1/11 - US$1.00; Q2/10 - US$0.98), increased 2% over Q1 2011 and 8% over Q2 2010. Price increases of $50/MT took effect Q2 2011 where contracts allowed. Our cash operating profit (after allocation of general and administrative expense to the business unit) was $15.1 million compared to $12.3 million in Q2 2010 and $16.0 million in Q1 2011. The decrease in cash
operating profit from Q1 2011 was due to higher general and administrative costs being allocated to this business unit and higher fixed costs as a result of a planned maintenance shutdown in the quarter at our Brandon facility. North American sodium chlorate industry operating rates are currently estimated to be. 96%, which should allow for continued pricing momentum in 2011 and 2012. The power line capacity upgrade to our Brandon plant is expected to be completed in 2012, setting the stage for further possible expansion opportunities.
-- Sales revenue for the North American chlor-alkali business was 54% higher than the prior year as a result of the technology conversion project ("TCP") at our North Vancouver plant in Q2 2010. The old diaphragm plant was shutdown on April 30, 2010 and the new membrane plant commenced initial production on June 25, 2010. Sales revenue for this business increased 17% in Q2 2011 over Q1 2011. Sales volumes increased for all products compared to the prior quarter (caustic soda 6%; chlorine 39%; hydrochloric acid 23%). Realized metric
electrochemical unit ("MECU") netback prices were down 1% from the prior quarter with higher realized caustic soda netback prices more than offset by lower realized netback prices for both chlorine and hydrochloric acid. We have announced a $120/MT price increase for caustic soda commencing in the third quarter as contracts allow, which is expected to result in significantly higher realized MECU netback prices in Q3 2011. Production volumes were 52,400 MECU, up 37% from Q1 2011 and the plant is running at capacity. Our cash operating profit
(after allocation of general and administrative expense to the business) improved to $9.7 million from $0.8 million in the prior quarter. Plant fixed costs were $1.7 million lower than the prior quarter due to the planned maintenance shutdown we took in March which added about $1.4 million. We expect to continue to see lower plant fixed costs as we achieve the remaining cost reduction benefits of TCP over the balance of 2011.
-- Cash operating profit in our Brazil business was $5.6 million, up from $4.6 million in Q2 2010 on stronger sales volumes of sodium chlorate as a result of our 4,400 MT expansion completed in Q2 2010, and down from $6.9 million in Q1 2011. We had a planned shutdown of our sodium chlorate plant in the quarter to coincide with a planned shutdown by our
major customer. Sodium chlorate sales volumes were down 9% compared to the prior quarter and chlor-alkali sales volumes were down about 3% reflecting the planned shutdown by our major customer. We expect demand from our major customer to remain strong for the balance of 2011, keeping our plants running at or close to capacity.
-- Today, our Board of Directors approved a $5.5 million project to expand our hydrochloric acid terminal capacity at our North American Terminal Operations ("NATO") site at Bruderheim to address expected ongoing significant demand from the oil and gas industry. This project is expected to be completed early in the fourth quarter. Mechanical integrity re-verification of our two 800,000 barrel salt caverns has been completed with positive results. This will support the potential large-scale development of the site to service the oilsands region.
-- Canadian dollar foreign exchange call option contracts were acquired at rates between US$1.02 and US$1.026, to protect US$5 million per month commencing July 1 until December 31, 2011.
-- On June 30, 2011, the Fund completed its previously announced convertible debenture bought deal financing. At closing, the Fund issued $60,000,000 aggregate principal amount of 5.75% Series IV Convertible Unsecured Subordinated Debentures (the "Series IV Debentures") at a price of $1,000 per Debenture that mature December 31, 2018. The net proceeds of the offering were used to repay long-term debt and resulted in a realized currency translation gain of $2.9 million.
-- As of June 30, 2011, total borrowings under committed credit facilities were $288.4 million with remaining available undrawn capacity of approximately $150.0 million. Cash on hand at June 30, 2011 was $6.9 million.
-- The previously announced plan of arrangement (the "Arrangement") was closed on July 8, 2011 resulting in the successful conversion of the Fund from an income trust to a corporate entity, Canexus Corporation. In connection with the Arrangement, all of the assets of the Fund were transferred to Canexus and Canexus assumed all of the liabilities of the Fund, including all of the obligations of the Fund with respect to convertible debentures outstanding.
"Canexus' financial and operating performance in the second quarter of 2011 was very solid, generating cash operating profit of $29.0 million, the top end of our previous guidance, with significant improvement in our sales revenue and gross profit driven primarily by our North America chlor-alkali business unit," said Gary Kubera, President and CEO. "These results are starting to reflect the value of the strategic investments made over the past few years. With our corporate conversion now complete, we are firmly committed to building future growth and sustaining reliable returns for our shareholders in the second half of 2011 and beyond."
"Global pulp markets remained strong and pulp prices remained at or near record highs in the second quarter, following further softwood price increases during the quarter. Global pulp inventory levels increased slightly during the quarter, closing in June at 34 days of supply, with softwood pulp inventories remaining tight at 28 days and hardwood pulp inventories holding at 42 days. Pulp shipments to China began to slow during the quarter as a result of paper mill maintenance and shortages of electricity and water in China. The weakening in China does not appear to be a result of weaker fundamental demand for pulp fiber and long-term demand growth is expected to continue. With limited global pulp capacity growth expected during the next 12 - 18 months, pulp market fundamentals are expected to remain sound. The majority of market pulp produced in North America is softwood. As a result of ongoing strong pulp market conditions, further announcements of pulp mill re-starts in 2012 were made during the quarter. Mill re-starts are expected to add approximately 30,000 MT of sodium chlorate demand to the North American market over this period. All our sodium chlorate plants are running at capacity and we expect this to continue through the remainder of 2011 and into 2012. And, with the power line capacity upgrade to our Brandon plant expected to be completed in 2012, we are increasingly confident about further possible expansion opportunities."
"The North America chlor-alkali industry operated at an estimated 90% of capacity in the quarter, as high industry capacity utilization continues to be supported by chlorine derivative exports to Asia from the US Gulf Coast. North American hydrochloric acid supply became more balanced with demand due to increased oil and gas drilling activity and acid consumption. Domestic and export demand for North American caustic soda remained strong due to high demand from the pulp and paper sector and lower export volume available from Japan, China and Taiwan. North American caustic soda supply is expected to increase in the third quarter of 2011 due to capacity expansions in Texas and Louisiana, and export demand is forecast to decline as production issues in Asia are resolved and Chinese capacity expansions are brought on line later this year."
"Significantly higher realized MECU netbacks are expected in the third quarter as a result of the $120/MT price increase announced for caustic soda as contracts allow. Caustic soda prices are expected to soften somewhat in Q4 with the increased supply discussed previously. With our North Vancouver chlor-alkali plant expected to run at or near capacity in the third quarter, we expect to realize the benefits of higher prices and lower costs as we continue to see the additional cost saving benefits from our technology conversion project."
"Brazilian pulp exports in the first half of 2011 were 1% lower when compared to 2010, as higher exports to Europe offset lower exports to China. Canexus Brazil's major sodium chlorate customer is on track to meet their 2011 pulp production targets, as are our other Brazilian pulp customers. Accordingly, Canexus Brazil's sodium chlorate and chlor-alkali plants are projected to operate at or near capacity rates for the duration of 2011."
"We continue to pursue opportunities to expand our NATO site at Bruderheim, Alberta. Our Board of Directors has approved a $5.5 million project slated for completion in the fourth quarter to expand our hydrochloric acid terminal capacity to meet the growing demand from the oil and gas industry. Mechanical integrity re-verification of our two 800,000 barrel salt caverns at the site was completed in the second quarter with positive results in further support of the potential large scale development of the site to service the oilsands region."
"Our payout ratio guidance for 2011 continues to be in the 90 to 95% range assuming a US$1.02 exchange rate and is expected to improve to about 70% in 2012. Today, the Board of Directors declared our first regular quarterly dividend as Canexus Corporation of $0.1368 per common share payable October 17, 2011 to shareholders of record on September 30, 2011," said Mr. Kubera.