CALGARY, AB—(Marketwired – August 05, 2015) – Canexus Corporation (TSX: CUS) (the “Corporation” or “Canexus”) today announced its financial results for the second quarter ended June 30, 2015.
Highlights
Cash Operating Profit (“COP”) was $27.6 million for the second quarter of 2015, excluding North American Terminal Operations (“NATO”), which can be attributed to solid performance by our chemical business units.
Record COP achieved by North American Sodium Chlorate, reflecting strong sales, a weaker Canadian dollar and solid North American sodium chlorate demand. Proven operating results and future opportunities position this business unit to generate significant value going forward.
As previously announced, Canexus has entered into an agreement to sell NATO to Cenovus Energy Inc. for $75 million cash consideration, subject to adjustment. Expected closing date remains August 31, 2015.
Substantial progress has been made on the Business Improvement Program (“BIP”). The program is on track to successfully deliver $10–15M in annual savings.
The caustic modernization project and the anode refurbishment project at North Vancouver are expected to be completed on schedule and below budget. Full access to 100% of our production capacity will occur in early Q4/2015.
Advanced discussions ongoing with the Corporation's banks to potentially amend the Corporation's current bank facility to provide flexibility to repay maturing convertible debentures at year end.
The Board of Directors declared a quarterly dividend of $0.01 per common share payable July 15, 2015 to shareholders of record on June 30, 2015.
Financial Results
COP was $27.6 million for the quarter ended June 30, 2015 (Q1/15 – $29.4 million; Q2/14 – $27.4 million); the COP excludes any losses from operations and expenses associated with the sale of NATO announced June 4, 2015. Our Q2/15 results reflect higher North American Sodium Chlorate sales levels; the benefit of the weaker Canadian dollar on both our North American Sodium Chlorate and Brazil businesses; and realized savings from our BIP.
These positive results were offset by reduced hydrochloric acid (“HCl”) sales volumes and prices due to the downturn in North American acid fracturing activity and one–time costs. One–time costs included a salt inventory adjustment within our North American Chlor–alkali business unit of $2.2 million, and $0.5 million in severance and professional fees, for a total one–time cash outlay of $2.7 million in Q2/15.
The NATO financial performance is reported in results from discontinued operations as it is an asset held for sale and all financial results associated with the asset are excluded from consolidated COP.
On December 31, 2015, $59.9 million of convertible debentures are due for repayment. Bank lenders have been engaged to discuss a potential amendment to the current bank facility to provide the Company with flexibility to repay all, or substantially all, of the convertible debenture from the facility at year–end. It is anticipated that any such amendment will be conditional on the closing of the NATO sale. While the discussions are advanced, there can be no certainty that any amendments will be successfully negotiated on terms satisfactory to Canexus, if at all.
Operational Results
North American Sodium Chlorate
Canexus' North American Sodium Chlorate business posted solid performance in the Q2/15. Record COP of $19.1 million (Q1/15 – $16.6 million; Q2/14 – $12.1 million) was achieved at our industry–leading, low–cost Brandon plant. We experienced higher demand from our pulp customers in Q2/15 than anticipated and expect this to continue through the remainder of the year. This business unit continues to benefit from the devaluation of the Canadian dollar relative to the US dollar, with approximately two–thirds of our sales volume exported to the US. North American sodium chlorate industry operating rates are expected to remain in the low to mid 90% range in the later part of 2015 due to an announced closure of a competitor's plant in the southeastern US. We expect this closure to generate opportunities for increased sales volumes in 2016.
North American Chlor–alkali
Canexus' North American Chlor–alkali business generated $1.3 million in COP for the quarter (Q1/15 – $8.1 million; Q2/14 – $9.8 million), or approximately $0.8 million after including inter–segment costs associated with loading caustic and acid from railcars to trucks at our NATO facility, which services are anticipated to be provided by a third party upon completion of our sale of the NATO asset. Q2/15 results also included a salt inventory adjustment of $2.2 million due to higher than estimated consumption rates in the period January 2013 to June 2015. Salt consumption for the period starting from 2013 was higher than expected due to flow restrictions in the brine saturators. The calculation to determine the differential between estimates and actuals is done routinely every couple of years. Process configuration changes completed in 2015 have reduced salt consumption below pre–2013 levels, as evidenced by subsequent evaluations, and the factor being used for estimates has been corrected to minimize future adjustments. The adjustment is not material for any prior periods.
As expected, HCl sales volume and prices showed continued softness through Q2/15. We estimate that demand from the oil and gas sector is down approximately 35 percent due to a decrease in global oil prices resulting in reduced drilling capital spend and consequently less demand for acid in fracturing. Price increase settlements for Q2/15 for chlorine and caustic soda, our two other major products, ranged from $20/MT to $50/MT as contracts allowed.
The caustic modernization project at North Vancouver is expected to be completed on schedule in October and is currently tracking below budget. Annual savings from this project are expected to be approximately $3.5 million from reduced stream usage of about 200,000 GJ/year, reduced base electricity load from smaller pump motors and the elimination of a dedicated steam plant operating position. In addition, our previously disclosed anode refurbishing program to repair the anodes is being completed and we should have full access to 100 percent of our production capacity in early Q4/2015.
South America
Canexus' Brazil operations generated COP of $7.4 million in the quarter (Q1/15 – $7.0 million; Q2/14 – $7.6 million). Brazil's operations continue to be highly stable with our primary customer running at high rates resulting in strong demand for our products which are sold under a long–term, cost plus, fixed US dollar margin contract. This business is also experiencing positive uplift from the devaluation of the Canadian dollar, due to our contract being paid in US dollars, and continuing stable merchant chlorine sales.
Business Improvement Program
Canexus initiated the BIP in March 2015. The ongoing benefits started to be realized in Q2/15. COP is estimated to improve by $10 million to $15 million annually from cost reduction and improved plant uptime. The full benefit is expected to be realized in 2016 and future years. Additionally, we plan to lower our investment in normalized working capital by not less than $10 million by the end of 2015 and to contain maintenance capital spending in future years to not more than $25 million (running average over a three year period) while improving operating reliability and manufacturing conversion efficiency and maintaining our strict adherence to safety.
Strategic Processes
As previously announced, Canexus has entered into an agreement to sell NATO in Bruderheim, Alberta to Cenovus Energy Inc. for $75 million cash consideration, subject to adjustment. The Purchase and Sale Agreement has an economic effective date of June 30, 2015, and an agreed closing date, subject to certain closing conditions, of August 31, 2015. All net proceeds will be used to pay down bank debt, as required under our credit facility.
The Corporation continues to hold discussions regarding the potential sale of our North American Chlor–alkali business at North Vancouver. There is no assurance that a transaction for this asset, if pursued, will be concluded.
“In the second quarter we accomplished many significant milestones that will better position the company for future value creation,” commented Doug Wonnacott, President and CEO. “Firstly, we announced an agreement to sell the NATO asset. This streamlines the company's operating portfolio of assets back to our core competency of commodity chemical products. It also reduces our risk exposure to the volatile energy markets. Secondly, we implemented many process changes as part of our BIP that have started to generate significant revenue and cost improvements. This includes lowering our SG&A, and continuing efficiency gains by reducing operating and maintenance costs, optimizing operations and improving transportation logistics. These changes, coupled with our foundation of strong chemical assets, position us well to reduce debt, continue to improve business performance and create future value for shareholders.”
Distributable Cash
Â
Three Months Ended
June 30
Six Months Ended
June 30
CADÂ thousands, except as noted
2015
2014
2015
2014
Cash Operating Profit
27,551
27,396
56,982
49,602
Â
Effect of Discontinued Operations
(6,582)
1,671
(9,215)
1,676
Â
Interest Expense
(8,253)
(6,078)
(15,678)
(8,060)
Â
Realized Foreign Currency Translation Gains (Losses)
(16,337)
249
(16,338)
(8,850)
Â
Maintenance Capital Expenditures
(7,618)
(5,151)
(12,221)
(9,403)
Â
Provision for Current Income Taxes
(1,967)
(678)
(3,707)
(2,551)
Â
Pension Funding Lower Than (in Excess of) Pension Expense
(316)
(742)
575
(1,646)
Â
Severance Costs
(1,947)
(551)
(501)
2,629
Â
Cash Settled Share Based Compensation
(89)
–
(89)
–
Â
Other
(351)
(715)
(2,551)
(1,015)
Distributable Cash
(15,909)
15,401
(2,743)
22,382
Â
Â
Â
Â
Â
Distributable Cash Per Share
(0.09)
0.08
(0.01)
0.12
Dividends Declared Per Share
0.0100
0.1000
0.0200
0.2368
Cash Payout Ratio (Net of DRIPÂ Participation)
(9%)
92%
(105%)
147%
Payout Ratio
(12%)
118%
(136%)
192%
Â
Â
Â
Â
Â
Below is a reconciliation of net cash generated from (used in) operating activities to Distributable Cash of the Corporation for the three and six months ended June 30, 2015 and 2014.
Â
Â
Â
Â
Three Months Ended
June 30
Six Months Ended
June 30
CADÂ thousands
2015
2014
2015
2014
Net Cash Generated from Operating Activities
(20,799)
10,390
20,457
3,058
Â
Change in Non–Cash Operating Working Capital
10,967
7,727
(8,795)
23,417
Â
Non–Cash Change in Income Tax Payable and Interest Payable
3,613
3,613
(1,574)
3,406
Â
Interest Income
101
72
350
138
Â
Maintenance Capital Expenditures
(7,618)
(5,151)
(12,221)
(9,403)
Â
Cash Settled Share Based Compensation
(89)
–
(89)
–
Â
Operating Non–Cash Items
(135)
(548)
(304)
(695)
Â
Severance Costs
(1,947)
(551)
(501)
2,629
Â
Discontinued Operations – Maintenance Capital Expenditures
(2)
(151)
(66)
(168)
Distributable Cash
(15,909)
15,401
(2,743)
22,382
Â
Â
Â
Â
Â
Segmented Information for the Three Months Ended June 30, 2015 and 2014
Canexus has a total of six electrochemical manufacturing plants — four in Canada and two at one site in Brazil — organized into three business units. Below is our first quarter performance by segment.
Â
Â
Â
Â
Â
Â
North America
Â
Â
Â
Three Months EndedÂ
June 30, 2015
Sodium
Chlorate
Chlor–
alkali
South
America
 Other
 Total
Sales Revenue
Â
Â
Â
Â
Â
Â
 Total Segment
67,837
48,648
26,233
–
142,718
Â
 Inter–Segment(1)
86
–
–
–
86
Total Sales Revenue from External Customers
67,751
48,648
26,233
–
142,632
Â
 Cost of Sales
39,361
30,862
20,673
(850)
90,046
Distribution, Selling and Marketing
Â
Â
Â
Â
Â
Â
 Total Segment
9,996
18,277
137
424
28,834
Â
 Inter–Segment
–
461
–
–
461
Total External Distribution, Selling and Marketing
9,996
17,816
137
424
28,373
General and Administrative
2,849
3,556
1,044
1,349
8,798
Operating Profit (Loss)
15,545
(3,586)
4,379
(923)
15,415
Add:
Â
Â
Â
Â
Â
Depreciation and Amortization
3,535
4,836
3,056
212
11,639
Share–based Compensation Recovery
–
–
–
497
497
Cash Operating Profit (Loss)
19,080
1,250
7,435
(214)
27,551
Cash Operating Profit (Loss) Percentage
28%
3%
28%
Â
19%
Â
Â
Â
Â
Â
Â
Â
Â
Â
Â
Â
Â
North America
Â
Â
Â
Three Months Ended
June 30, 2014
Sodium
Chlorate
Chlor–alkali
South
America
Other
Total
Sales Revenue
Â
Â
Â
Â
Â
Â
Total Segment
53,873
55,354
24,193
–
133,420
Â
Inter–Segment
86
–
–
–
86
Total Sales Revenue from External Customers
53,787
55,354
24,193
–
133,334
Â
Cost of Sales
34,191
32,440
17,806
39
84,476
Distribution, Selling and Marketing
Â
Â
Â
Â
Â
Â
Total Segment
7,952
16,475
253
583
25,263
Â
Inter–Segment(1) (2)
–
606
–
–
606
Total External Distribution, Selling and Marketing
7,952
15,869
253
583
24,657
General and Administrative
2,853
3,479
836
2,224
9,392
Operating Profit (Loss)
8,791
3,566
5,298
(2,846)
14,809
Add:
Â
Â
Â
Â
Â
Depreciation and Amortization
3,329
6,199
2,332
282
12,142
Share–based Compensation Expense
–
–
–
445
445
Cash Operating Profit (Loss)
12,120
9,765
7,630
(2,119)
27,396
Cash Operating Profit Percentage
23%
18%
32%
Â
21%
Notes:
(1)
The North America Sodium Chlorate operating segment (i) sells sodium chlorate at market rates to the South America operating segment and (ii) provides transloading services at market rates to the North America Chlor–alkali (“NACA”) operating segment for caustic soda transloaded from barges into trucks for delivery to NACA customers that are eliminated for financial reporting purposes.
(2)
NATO charged transloading fees (approximating market rates charged by third party terminals) to the North America Chlor–alkali operating segment for hydrochloric acid and caustic soda transloaded from railcars into trucks for delivery to North America Chlor–alkali customers that are eliminated for financial reporting purposes.
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Â
Highlights for each business unit are as follows:
North America Sodium Chlorate:
Q2 2015 versus Q1 2015: Sales revenue for the North America Sodium Chlorate segment increased eight percent as a result of higher US and Canadian sales volumes (eight and three percent, respectively) and higher realized delivered prices in the US (two percent) resulting from the weakening Canadian dollar (three months ended June 30, 2015 – US $0.81 as compared to US $0.83 for the three months ended March 31, 2015). Cash Operating Profit Percentage increased from 26 percent to 28 percent as a result of higher realized netback prices (one percent) and production volumes (three percent) and lower per unit salt, electricity and natural costs more than offsetting higher fixed costs.
Q2 2015 versus Q2 2014: Sales revenue increased 26 percent in the second quarter of 2015 as compared to the same period in 2014. Increased US and Canadian sales volumes (24% and five percent, respectively) and delivered price increases (12%) fuelled by the weakening of the Canadian dollar (three months ended June 30, 2015 – US $0.81 as compared to US $0.91 for the three months ended June 30, 2014) more than offset small declines in offshore sales volumes. Cash Operating Profit Percentage increased from 23 percent to 28 percent with higher realized netback prices (eight percent) and production volumes (eight percent), along with lower per unit salt and natural gas costs, more than offsetting higher fixed costs and electricity costs.
North America Chlor–alkali:
Q2 2015 versus Q1 2015: Sales revenue for the North America Chlor–alkali segment decreased six percent due to lower Canadian HCl sales volumes (43 percent) and lower US market realized delivered prices for HCl (50 percent), offset somewhat by higher North American chlorine sales volumes (29 percent), higher US hydrochloric acid sales volumes (nine percent) and higher chlorine and caustic soda realized delivered prices in the US market (14 and five percent, respectively). The decline in Canadian HCl sales volumes was related to lower demand from the oil and gas sector as commodity prices continued to be under pressure, resulting in reduced drilling and hydraulic fracturing activity. Increases in US market chlorine and caustic soda realized delivered prices were primarily the result of the weakening Canadian dollar noted previously. Cash Operating Profit Percentage decreased from 16 percent to three percent as a result of shifts in product mix away from higher margin HCl into lower margin chlorine, lower realized MECU netback prices (10 percent), higher fixed, salt and electricity costs and a salt inventory adjustment of $2.2 million.
Q2 2015 versus Q2 2014: Sales revenue for the North America Chlor–alkali segment decreased 12 percent due to lower HCl and caustic soda sales volumes (28% and 11 percent, respectively) and HCl realized delivered prices (eight percent) more than offsetting higher chlorine sales volumes and realized delivered prices (nine percent and 40%, respectively) and higher caustic soda realized delivered prices (four percent). Consistent with the preceding paragraph, the declines in HCl sales volumes were driven primarily by demand reductions from the oil and gas segment, while increases in realized delivered prices were primarily seen in the US market and were the result of the weakening Canadian dollar. Cash Operating Profit Percentage decreased from 18 percent to three percent as a result of a shift in product mix away from higher margin HCl into lower margin chlorine, higher salt and per unit electricity prices, lower production volumes (six percent) and the salt inventory adjustment noted above.
South America:
Q2 2015 versus Q1 2015: Sales revenue for the South America segment increased four percent primarily due to higher chlorine and HCl sales volumes (17% and six percent, respectively) and caustic soda realized delivered prices (five percent) more than offsetting lower sodium hypochlorite sales volumes (10%) and lower HCl and chlorine realized delivered prices (eight percent and seven percent). Realized delivered prices under our US dollar fixed margin contract benefitted from the weaker Canadian dollar in the second quarter. Cash Operating Profit Percentage remained consistent at 28 percent as a result of lower chlorate production volumes and higher fixed costs being offset by higher chlor–alkali production volumes (six percent) and the benefit of the weaker Canadian dollar on US dollar fixed margin sales.
Q2 2015 versus Q2 2014: Sales revenue for the South America segment increased eight percent due to higher realized delivered chlorate, caustic soda and sodium hypochlorite prices (15%, eight percent and three percent, respectively) and higher HCl and caustic soda sales volumes (five percent and six percent, respectively) more than offsetting lower chlorate sales volumes (five percent) and lower HCl and chlorine realized delivered prices (16% and nine percent, respectively). Cash Operating Profit Percentage decreased to 28 percent from 32 percent as a result of significant fixed cost savings, higher chlor–alkali production volumes and the benefit of the weaker Canadian dollar on US dollar fixed margin sales being more than offset by 14 percent lower chlorate production volumes and higher electricity costs; the majority of which is passed on to our major customer.
General Market Fundamentals
North America Sodium Chlorate: Through June 2015, global pulp shipments rose 4.6 percent compared to the same period in 2014. Hardwood pulp shipments continue to lead the way, up nearly 10 percent for the same period. Combined producer inventory levels at June 2015 stood at 34 days, with bleached softwood and hardwood kraft inventories at 29 days and 34 days respectively. Both inventory levels are considered to be in balanced positions entering the second half of the year.
North America demand for sodium chlorate was stable in the second quarter with spring mill outages ending in late June. Sodium chlorate exports from North America totaled just over 65 thousand MT through May and are tracking with 2014 levels. Industry operating rates continue to be in the low 90 percent range and are expected to remain at this level through November, at which point capacity utilization is expected to increase due to the closure of a Tronox plant, announced for the fourth quarter of 2015. Price increase announcements were released in April for implementation as contracts permit.
North America Chlor–alkali: The chlor–alkali industry operating rate in North America increased 2.7 percent to 81.5 percent of capacity in the second quarter of 2015 as compared to the first quarter of 2015. This increase was due to improvement in demand from the vinyls segment and inventory restocking to offset the impact of ethylene supply shortages in the prior quarter. Caustic soda production increased in the second quarter consistent with the increased industry chlorine operating rate.
HCl burner operating rates declined in the second quarter due to a reduction in demand from lower drilling and hydraulic fracturing activity in the oil and gas industry and a temporary slowdown in c