Canexus Announces 2016 Second Quarter Results

Transcription

1 NEWS RELEASE FOR IMMEDIATE RELEASE Canexus Announces 2016 Second Quarter Results Calgary, Alberta August 11, 2016 Canexus Corporation (TSX: CUS) (the Corporation or Canexus ) today announced its financial results for the second quarter ended June 30, Highlights Cash Operating Profit ( COP ) was $22.6M for the second quarter of 2016 including severance costs of $2.1M related to a G&A cost initiative as part of the Business Improvement Program ( BIP ) and expenses related to the terminated Superior Transaction (as defined below) of $1M (Q1/16 $26.5M including expenses related to the terminated Superior Transaction of $4.5M and certain litigation costs of $0.1M; Q2/15 - $27.6M). Results reflect continued strong performance from the North American Sodium Chlorate and South America business units. Canexus outlook for 2016 Cash Operating Profit remains at $100-$110M excluding expenses related to the terminated Superior Transaction of $5.5M, severance costs related to BIP initiatives of $2.2M and certain litigation costs of $0.1M incurred as of June 30, The Corporation continues to execute its go-forward strategy to improve financial flexibility and reduce debt by $100M by the end of 2018: o As part of the next phase of its BIP, Canexus implemented additional G&A cost reductions which, in conjunction with other 2016 initiatives, are anticipated to generate $6 - $8M of COP improvements annually and contribute to our target of 5% compound COP annual growth rate over the next three years. o Canexus is committed to managing maintenance capital to average $25M per year over three years. o The Corporation has suspended its cash dividend. Canexus has received commitments from a syndicate of six banks for a $425 million total credit facility, including a $350 million extendible revolving credit facility (amending the existing extendible revolving credit facility that was set to mature on June 30, 2017) and a $75 million bridge loan that will expire nine months after closing and replaces the current non-revolving term facility. This credit facility is in the final legal stages of completion and is expected to be fully executed before August 31, The amended extendible revolving credit facility will have a maturity date of August 31, Production at the North Vancouver chlor-alkali plant is now ramping up as the rebuilt chlorine compressor undergoes testing and commissioning. Once fully operational, the plant is expected to be restored to full production capability. Canexus recovered $2.7M in interim insurance proceeds related to the compressor outage in the second quarter. On June 30, 2016, the Arrangement Agreement dated October 5, 2015 between Superior Plus Corp. ( Superior ) and Canexus ( Arrangement Agreement ) was terminated by Canexus after Superior failed to obtain Federal Trade Commission ( FTC ) approval of the transaction contemplated by the Arrangement Agreement (the Superior Transaction ) and Superior declined to provide certain reasonable protections

2 necessary for Canexus to agree to extend the outside date of the Arrangement Agreement beyond June 29, Financial Results Cash Operating Profit was $22.6M for the second quarter of 2016 including severance costs of $2.1M related to a G&A cost initiative as part of the Business Improvement Program and expenses related to the terminated Superior Transaction of $1M (Q1/16 $26.5M including expenses related to the terminated Superior Transaction of $4.5M and certain litigation costs of $0.1M; Q2/15 - $27.6M). Our Q2/16 results reflect strong sales revenues from our North American Sodium Chlorate business unit supported by solid demand and ongoing weakness in the Canadian dollar relative to the US dollar. Growing chlorine demand and solid caustic soda market demand supported higher realized prices in those markets over the same period last year. Brazil continues to generate strong COP based on the realized margin from our fixed US dollar margin contract with our primary customer. These positive results were partially offset by continued weak hydrochloric acid ( HCl ) demand due to reduced oil and gas hydraulic fracturing activity. Interim insurance proceeds related to the chlorine compressor outage of $2.7M were received in the second quarter. Operational Results North American Sodium Chlorate Canexus North American Sodium Chlorate business continued to generate solid results, as Q2/16 COP of $17.9 million (Q1/16 $22.4 million; Q2/15 $19.1 million) was achieved. We experienced higher realized prices from US volumes compared to the same quarter in the previous year, as a result of the weakness of the Canadian dollar relative to the US dollar, with approximately two-thirds of our sales volume exported to the United States. Quarterly business unit sales volumes declined approximately 4% over the same quarter in the previous year due primarily to a higher number of planned customer mill outages and flooding in the southeastern United States. North American sodium chlorate industry operating rates are expected to remain near 92% for the balance of the year. North American Chlor-alkali Canexus North American chlor alkali business had nil Cash Operating Profit in the quarter (Q1/16 $2.4 million; Q2/15 $1.3 million). We realized higher caustic soda prices relative to the same period last year. Chlorine sales volumes were up over the same quarter in the previous year, reflecting North American chlorine demand growth. Negatively impacting COP was the approximate 41% decline in HCl sales volumes compared to the same period last year due to the slowdown in oil and gas hydraulic fracturing activity in Canada and the United States. As well, customer mill outages and a change in the customer portfolio contributed to Canexus sales volumes declining by approximately 9% over the same period last year. During the second quarter, the North Vancouver plant operated at reduced capacity due to a compressor outage caused by mechanical failure in Q3/15. The rebuilt compressor has now

3 been installed and is in the process of testing and commissioning. Once fully operational, the plant is expected to be restored to full production capability. Given the weakness in the HCl market, the overall impact of the compressor outage to the business was less significant than under normal market conditions. The Corporation continues to proceed with a claim under its insurance policies after receiving an interim payment in the second quarter. With increased capacity and given the successful completion of last year s caustic modernization and anode replacement projects, Canexus is well positioned to profit from any future recovery in the HCl market. South America Canexus Brazil operations generated COP of $7.2 million in the quarter (Q1/16 $7.7 million; Q2/15 $7.4 million). Brazil s operations continue to be highly stable with our primary customer running at high production 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 a positive uplift from the ongoing weakness of the Canadian dollar and the Brazilian Real as compared to the US dollar, as well as lower purchased product and fixed costs. Focus 2018: Improve Operating Performance and Financial Flexibility On July 5, 2016, Canexus announced its plan to focus on the operational excellence of its core assets to improve efficiency and maximize margins through its BIP to achieve 2016 COP of $100 - $110M excluding severance costs and expenses related to the terminated Superior Transaction. As part of its go-forward strategy, Canexus implemented the next phase of its BIP resulting in additional G&A cost reductions. Total BIP initiatives identified for 2016 are anticipated to contribute $3 - $5M to COP with annualized improvements of $6 - $8M. BIP initiatives will contribute to the Corporation s target of 5% compound annual growth rate for COP over the next three years. In addition, Canexus primary strategic focus is to lower its debt position, targeting a $100M reduction by the end of The Company expects to reduce its total senior debt to earnings ratio to 2.5x times over the same time period. The Company will direct free cash flow to debt reduction. Maintenance capital is expected to average $25 million/year. In order to further enhance its financial strength and flexibility, the Corporation has suspended the cash dividend. Amendment and Extension of Credit Facility The Corporation has commitments from a syndicate of six banks for a $425 million total credit facility including a $350 million extendible revolving credit facility (the Facility ) amending the existing extendible revolving credit facility that was set to mature on June 30, 2017 and a $75 million bridge loan (the Bridge Loan ) that will expire nine months after closing and replaces the current non-revolving term facility. The Facility and the Bridge Loan are in the final legal stages of completion and are expected to be fully executed before August 31, 2016 and the Facility will have a maturity date of August 31, Following execution, amounts owing under the Facility will no longer be current in nature. Management believes net cash generated from operating activities will be sufficient for the Corporation to meet future obligations and commitments that arise in the normal course of its business activities, including ongoing maintenance capital expenditures and normal course

4 financial commitments. The Facility will allow for a relaxed senior debt leverage ratio while the Bridge Loan is outstanding, providing sufficient liquidity to execute the corporate strategy. Termination of Superior Transaction and Reverse Termination Fee The Arrangement Agreement was terminated by Canexus after Superior failed to obtain FTC approval of the Superior Transaction and Superior declined to provide certain reasonable protections necessary for Canexus to agree to extend the outside date of the Arrangement Agreement beyond June 29, These protections were necessary for Canexus, in good faith, to incur the significant additional cost and risks associated with protracted, expensive and highly uncertain litigation against the FTC in Washington, DC. Under the terms of the Arrangement Agreement, a reverse termination fee of $25M is payable by Superior to Canexus. On July 5, 2016, Canexus initiated legal proceedings against Superior to recover the $25M reverse termination fee. Superior has counterclaimed, claiming that Canexus was in breach of certain provisions of the Arrangement Agreement. Canexus believes that Superior s counterclaim is without merit and expects a positive judicial outcome. As the matter of the claim and counterclaim is now before the Court of Queen s Bench of Alberta, Canexus will have no further statement to make unless and until a decision is reached by the court or a settlement is reached with Superior. Financial Results Highlights Three Months Ended June 30 Six Months Ended June Average Canadian to US dollar exchange (1 CAD to USD) Period end Canadian to US dollar exchange (1 CAD to USD) Sodium Chlorate Sales Volume (000 s MT) Chlor-alkali Sales Volume (000 s MECU) Sales Revenue (2) $000s) 135, , , ,289 Cash Operating Profit (1) (2) ($000s) 22,610 27,551 49,136 56,982 Maintenance Capital Expenditures (2) ($000s) 3,993 7,618 8,198 12,221 Notes: (1) Cash Operating Profit is a non-gaap measure. See Non-GAAP Measures. (2) Excludes the results of discontinued operations.

5 Segmented Information for the Three Months Ended June 30, 2016 and 2015 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 second quarter performance by segment. Three Months Ended June 30, 2016 Sales Revenue North America Sodium Chlorate Chlor alkali South America Corporate Total Total Segment 66,633 45,360 24, ,025 Inter Segment (1) Total Sales Revenue from External Customers 66,560 45,360 24, ,952 Cost of Sales 39,241 28,110 19, ,795 Distribution, Selling and Marketing Total Segment 9,749 18, ,397 Inter Segment (1) Total External Distribution, Selling and Marketing 9,749 17, ,324 General and Administrative 3,190 3, ,626 10,642 Operating Profit (Loss) 14,380 (4,680) 3,776 (3,285) 10,191 Add: Depreciation and Amortization 3,547 4,521 3, ,623 Share based Compensation Expense Cash Operating Profit (Loss) 17,927 (159) 7,162 (2,320) 22,610 Three Months Ended June 30, 2015 Sales Revenue North America Sodium Chlorate Chlor alkali South America Corporate Total Total Segment 67,837 48,648 26, ,718 Inter Segment (1) Total Sales Revenue from External Customers 67,751 48,648 26, ,632 Cost of Sales 39,361 30,862 20,673 (850) 90,046 Distribution, Selling and Marketing Total Segment 9,996 18, ,834 Inter Segment (1) (2) Total External Distribution, Selling and Marketing 9,996 17, ,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 (Deduct): Depreciation and Amortization 3,535 4,836 3, ,639 Share based Compensation Expense Cash Operating Profit (Loss) 19,080 1,250 7,435 (214) 27,551 Notes: (1) The North America Sodium Chlorate operating segment provides transloading services at market rates to the 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 NACA operating segment for HCl and caustic soda transloaded from railcars into trucks for delivery to NACA customers that are eliminated for financial reporting purposes.

6 Operating Results for the Three and Six Months Ended June 30, 2016 and 2015 Three Months Ended June 30 Six Months Ended June 30 CAD thousands CONTINUING OPERATIONS Sales Revenue 135, , , ,289 Cost of Sales (1) 86,795 90, , ,438 Gross Profit 49,157 52, , ,851 Distribution, Selling and Marketing 28,324 28,373 56,613 54,340 General and Administrative (2) 10,642 8,798 23,236 18,746 Operating Profit 10,191 15,415 24,546 33,765 Finance Expense (9,003) (4,550) (6,007) (19,093) Other Income (Expense) 2,931 (53) 4,447 (2,577) Income Before Income Taxes 4,119 10,812 22,986 12,095 Provision for (Recovery of) Income Taxes 161 (55,585) 2,512 (54,258) Income from Continuing Operations 3,958 66,397 20,474 66,353 DISCONTINUED OPERATIONS Loss from Discontinued Operations (215,230) (221,118) Net Income (Loss) 3,958 (148,833) 20,474 (154,765) Notes: (1) Depreciation and Amortization included for the three and six months ended June 30, 2016 $11.4 million and $22.8 million, respectively (three and six months ended June 30, 2015 $11.4 million and $22.7 million, respectively) (2) Depreciation and Amortization included for the three and six months ended June 30, 2016 $0.2 million and $0.4 million, respectively (three and six months ended June 30, 2015 $0.2 million and $0.4 million, respectively) Conference Call Canexus will hold a conference call on August 12, 2016 at 8:30 am MT (10:30 am ET) to discuss Canexus second quarter 2016 financial results. A news release will be issued the evening before the call. Financial Statements and Management s Discussion and Analysis will be posted on the Canexus website at and filed on SEDAR. The call will be hosted by Doug Wonnacott, President and Chief Executive Officer; Dean Beacon, Senior Vice President, Finance and Chief Financial Officer; Brian Bourgeois, Senior Vice President Sales and Marketing; and Ross Wonnick, Vice President, General Counsel and Corporate Secretary. Following the call there will be a question and answer session for analysts and institutional investors. To access the call, please dial or outside Canada and US. A replay of the conference call will be available until end of day ET on August 19, To access the replay call or outside Canada and US, followed by passcode #.

7 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 targets opportunities to maximize shareholder returns and delivers high quality products to its customers and is committed to Responsible Care through safe operating practices. Canexus' common shares (CUS) and debentures Series IV CUS.DB.B; Series V CUS.DB.C; Series VI CUS.DB.D) trade on the Toronto Stock Exchange. More information about Canexus is available at Non GAAP Measure Cash Operating Profit (Loss) is a financial measure not determined in accordance with generally accepted accounting principles for publicly accountable enterprises in Canada ( GAAP ), but which management believes is useful in measuring the Corporation s performance. Readers are cautioned that this measure should not be construed as alternative 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 MD&A for the three and six months ended June 30, 2016 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 and financial and operating results of the Corporation and its subsidiaries, including with respect to: expectations for improved operating performance and financial flexibility generally, the reliability of the Corporation s earnings expectations for chlor-alkali recovery, the strength and stability of the business fundamentals and the performance of the Corporation s North American sodium chlorate and Brazil business units, the ability to improve efficiency and maximize margins, expectations for the size and timing of cash operating improvements and the compound annual growth rate thereof, the Corporation s ability to reduce its bank indebtedness and the timing and quantum thereof, expectations regarding the terms of and the Corporation s entrance into the Facility and the Bridge Loan and its impact on Canexus liquidity, expectations for the Corporation s rebuilt compressor at North Vancouver and its impact on plant production capabilities, the Corporation s ability to lower its senior debt to earnings ratio, the Corporation s expectations for free cash flow, the quantum of maintenance capital expenditures, and the Corporation s ability to manage such expenditures over the next three years, expectations regarding the sufficiency of net cash from operating activities to meet ordinary course obligations and commitments, and the outcome of litigation with Superior. 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. Forward looking 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

8 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 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 Corporation 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. Any financial outlook information contained in this news 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. Readers are cautioned that such financial outlook information contained in this news release should not be used for purposes other than for those for which it is disclosed herein. Further Information: Dean R. Beacon Senior Vice President, Finance and CFO Canexus Corporation (403) Sarah Scott Investor Relations Canexus Corporation (403)