Q4 2013 MFC Industrial Ltd Earnings Conference Call

Mar 31, 2014 AM EDT
MFCB - Mfc Bancorp Ltd
Q4 2013 MFC Industrial Ltd Earnings Conference Call
Mar 31, 2014 / 02:00PM GMT 

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Corporate Participants
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   *  Kevin McGrath
      Cameron Associates - IR
   *  Michael Smith
      MFC Industrial Ltd. - President & CEO
   *  James Carter
      MFC Industrial Ltd. - CFO

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Conference Call Participants
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   *  Van Carlin
      Wells Fargo Securities, LLC - Analyst
   *  Jeff Geygan
      Milwaukee Private Wealth Management - Analyst
   *  Joe Pratt
      Wells Fargo Securities, LLC - Analyst

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Presentation
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Operator   [1]
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 Good day ladies and gentleman. And welcome to the MFC Industrial Limited 2013 yearend conference call. My name is Kim and I will be your operator for today.

 At this time, all participants are in listen-only mode. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.

 I would now like to turn the conference over to your host for today, Mr. Kevin McGrath, of Cameron Associates. Please proceed.

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 Kevin McGrath,  Cameron Associates - IR   [2]
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 Thank you and good morning. We appreciate your interest in joining us on MFC's conference call and webcast to discuss the financial results for the 12-month period ended December 30, 2013. On the call with me today are Michael Smith, President and CEO; James Carter, Chief Financial Officer; and Rene Randall, Vice President.

 The Company will make a brief presentation on the results announced this morning and then open the call to questions. Today's call is being webcast on our website at mfcindustrial.com.

 Simply click on the tab in the webcast section to access the webcast. The webcast will be posted at mfcindustrial.com for replay approximately two hours following the end of this call. The replay will stay on the site for on-demand review for the next several days.

 Certain statements in the conference call will be forward-looking statements which reflects managements' expectations regarding future growth, results of operation, performance and business prospects and opportunities. For detailed information about risks and uncertainties that could cause our actual results to differ materially from those expressed or implied, please refer to disclaimer for forward-looking information contained in today's press release on file with the Canadian securities regulators and on Form 6-K with the SEC. I would now I turn the call over to Michael to begin the conference.

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 Michael Smith,  MFC Industrial Ltd. - President & CEO   [3]
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 Thank you very much. Ladies and gentlemen I appreciate you listening to our call this morning. Let me first summarize to you is that we had a great growth year in revenues but a very disappointing year in bottom-line profits.

 Our industry is a top line industry and I think the money that we have spent to obtain that is fine but we now have to seriously get our margins higher. Our GA costs are quite high. Our SG&A for the year was $63 million versus $47 million the prior year.

 In the fourth quarter, results were a loss which predominantly a non-cash loss. But I'd like to think it is appropriate maybe for Jim Carter to review that loss and give you some explanation as to why the loss occurred. Jim?

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 James Carter,  MFC Industrial Ltd. - CFO   [4]
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 Thank you Michael. Essentially we realized an overall total net income for the year of $9.7 million but unfortunately as Michael mentioned this was marred by a loss of approximately $12.6 million realized in the fourth quarter. Again it should be noted that the adjustments leading to that loss which were recorded in Q4 were of a non-cash nature.

 And they're generally of a one-off type. They were the result of comprehensive reviews that we carried out on different areas of our recent acquisition of MFC Energy which an area such as asset reclamation obligations, deferred taxes, etc. And these arose mainly from accounting methodology applications.

 The corrections are summarized in total. The impairment charge of $6.1 million. Depreciation and depletion adjustments of $4.2 million and an adjustment to our deferred tax assets of $4.9 million.

 So the grand total of these adjustments for in the quarter was $15.2 million. However, there were a number of positive items during the year as well.

 The Company had realized EBITDA of $65 million in 2013 compared to $45 million in 2012. At yearend, we had working capital of $396 million which was an increase of $60 million over the prior year. Our working capital ratio at December 31, 2013, was approximately 2.3 and our equity per share was $11.18.

 Our long-term debt-to-equity ratio at that time was 0.27. And as well I would like to point out that at December 31, we had cash and cash equivalents of $334 million and credit facilities available to us aggregating $512 million.

 There are as well of some items that should be taken into consideration when we talk about our results for the year. During 2013, we were severely impacted by the catastrophic flooding that took place in Alberta in July. This was the worst in the providence's history.

 As previously reported, one of our sour gas pipelines feeding the Mazeppa Processing Plant was damaged and exposed. And this resulted in shutting down the plant in mid July which lasted until September 26. The result of that was loss revenue in excess of $5 million plus approximately $2 million in costs to replace pipeline.

 We are in the process of finalizing our claim in this regard but because of the uncertainty surrounding what this final settlement amount might be with our insurance company we have not reflected any provision for this in our financial statement. But it did have a severe impact on our revenue.

 As well as Michael mentioned during 2013 our G&A costs increased overall as a result of the integration of our 2012 acquisitions as well as the expenses incurred in hiring additional staff to develop new markets and customer and supplier relationships. Little if any benefits from these initiatives were enjoyed in 2013 but they will be realized in future years.

 As well we incurred significant professional fees related to both the new acquisitions and other corporate matters. I'd like to give you a brief update on natural gas as well. During 2013, MFC Energy, which was formally Thompson Petroleum, produced 17.5 million cubic feet of natural gas and related byproducts which converted to 3,450,000 barrels of oil equivalents and this is outlined in our press release.

 And as shown the average price realized from our natural gas sales was CAD3.46 per Mcf. And the netback per BOE was CAD10.16.

 I might also point out in that regard that MFC Energy's cash flow breakeven natural gas price for the year was CAD1.90. On the full accounting basis which is inclusive of depletion and other non-cash costs, the operating breakeven price was CAD2.81 in Mcf. So that is sort of the highlights that I have and I'd be happy to answer any questions for you.

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 Michael Smith,  MFC Industrial Ltd. - President & CEO   [5]
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 So Jim, before we go to the questions let me just continue to review. I think there's a couple more items in the energy side we should talk together about.

 Let me go forward now and just bring you up-to-date on some of the pressing projects which we are involved. And also some new projects and give you a flavor of where we are going.

 One of the assets which we have and has been a long-term asset is a royalty from the Wabush mine in Newfoundland. The Wabush mine has been just recently been put on idle by the operator, Cleveland Cliffs, or Cliffs Resources. We do anticipate some pain from them putting it on idle but we are working now to make it a long-term gain.

 Us and other stakeholders are quite interested in the property but we have strong contractual rights to the property and are discussing it with Cliffs and others. We have not taken an impairment on the property. We are receiving or we will be receiving if Cliffs does not default, 3.25 minimum royalty per year.

 Otherwise we get to take the property. So I would say if I was analyzing it from your perspective it is a work in progress. And we will be looking hard at it and the potential gain we see it to be substantial in the future if we can achieve the rationalization of the asset.

 So that is Wabush. You know one of the nice things we have done this year we have entered into a participation agreement to drill some wells in Canada. We have a very, very good operator, high-quality operator.

 And they are doing that now. And the economic terms of it to us are very, very good. They pay all the costs.

 And we get the right to look back, when we say look back, after they have drilled the well ordered to an economic condition, we can look back and see if we want to invest in it. And investing in it really means that we will then buy at cost 30% of the well and be an owner for actually 25% of the cost.

 Or we could just say no, I do not wish to do that and they will pay us a 10% royalty of all the products which is generated from that particular well. That is quite interesting and quite exciting and we look forward as that develops out more this year.

 But one of the extra things that they have agreed to and will be doing, all the natural gas that they produced, they will sell to our plant. We have a gas processing plant in the area and of course this will be sold to us at commercial rates which certainly won't help but will have, make the plant more profitable.

 Our energy business is being developed further. I don't really have a lot to say because we are in the middle of negotiations on contracts. What I can say to you is that the gas to electricity is completely underway.

 So that is working out. But we have not finished tying up all the corners of a deep-cut and fractionation plant which we would like to do. But hopefully we will in the further future.

 On the commodity side, all of the commodity companies are now fully integrated which is a strong positive from our point of view. And we are starting to see benefits, people working together, products being sold, financings becoming more efficient.

 So that is one of the reasons why I think we can see some bottom-line benefits as well as the top-line growth. But one of the most important things that has happened which we were working on last year which is being brought to a head this year is the acquisition of two companies.

 One called Elsner. Elsner is a very similar business two hours located in Austria. And that company has been purchased and the first phase of integration has occurred and we are very pleased.

 We know their people and we know their products and these products can be sold not just by the Elsner people but also our people in Mexico, our people in Argentina and in America. So it is integration of value there.

 Elsner was a company that was owned by an institution and it was really not, the last five or six years, it was not viewed as a business. It was more viewed as a risk as the institution was a financial institution.

 Nothing against the financial institution, I just think they didn't have time to spend to develop it. And now we come in there and we can provide them with risk management and the credit which they need.

 And we have already seen that in a short period of time that that would certainly benefit us for this entire year. And it goes back to this top-line and bottom-line, we have got to increase our sales and get them to the area of $1.6 billion, $1.7 billion.

 Then we feel that we are starting to get the critical mass that we need.

 The other project is a project called FESIL which we actually are closed as we speak. The monies actually were paid about an hour ago. And so I am very pleased with that.

 So FESIL's people have now joined the MFC family and that project is underway and the conditions have all been met. As I say, the money has been paid which is the most important.

 With this, we are paying out $82 million. It was important when we did that, we analyzed how we can get that $82 million into long-term debt.

 So we are now applying to have a long-term credit facility with the same amount of money so we are always very conscious now of our ratios and we will be doing that. We will finance this acquisition through that, through long-term debt, new long-term debt.

 The credit facilities, for both Elsner and FESIL, we have but we will be looking to reduce their balance sheets which would of course reduces our overall balance sheet by taking some of their assets and selling them off on a factoring line. But we want to make our balance sheets not grow substantially and I think we have a plan to do that which is important.

 Let me touch on a little bit of FESIL's management. We were very impressed and pleased with those people. And we feel that they can help and complement our other people.

 And we are looking very positively to see all these people becoming MFC people and seeing that integration occurring. Certainly there's a synergy on products, certainly the synergy on risks, certainly as on financing. And I think there's certainty of synergy also on putting their people and our people together and drawing on each other strengths and eliminating their weaknesses.

 One of the biggest parts of this Elsner and FESIL in our operations is China. So important that China operations become strong, and by putting these different groups together we have a broader base in China so we can source products at a more reasonable price, be assured of quality control and see that the China side becomes a strong benefit.

 Because the benefit in China besides buying correctly is the logistics and the money we save in shipping. And that is a major part. And I think we can now can see good strength with the integration of those three operations in the China market.

 I think when you come back and see FESIL, they will produce let's just say 125 million a year of ferrosilicon. And they do that up in Norway, and they do it by close to the arctic circle in a place called Rana.

 Their product is completely sold and it is basically a high-quality commodity. Prices have gone up a little bit.

 A year ago the price was EUR1,075 per tonne. End of last year it was $1,120 a tonne and now it is up to $1,150 a tonne though we would like it to go higher of course and but I think we're quite happy and we look forward to having good profits from that plant and good product for our salespeople to sell around the world globally.

 Before we go to questions and answers, I just would like to say two things. One, we have changed corporate governance internally. And I think we have done some good things.

 One of those good things is that we have taken away the poison pill of the shareholder's right and we'd cancel there. We wanted to cancel it, number one we think it really doesn't help.

 We want to be a public company. We do not want to be a private company, we want freedom for shareholders to buy and sell their shares.

 We have also asking our shareholders to vote and have orders passed, a resolution where we have taken away what we call the staggered Board approach where shareholders elect Board Members on a three-year rotating term. In some countries that is acceptable but we feel if we're going to now progress and be proud and go forward as a public company, our shareholders should elect our directors on an annual basis. And I think these are two very, very important rules.

 In addition we have a elected Peter Kellogg to the Chairman of the Board. And Peter to us this is a very good sign. Peter owns 33% of the stock and his people have helped us in many ways and we respect that and look forward to working with him in the future.

 And lastly, I just want to say the most important thing we have done with these acquisitions and with the Company, we have not gone outside of our balance sheet or hurt our ratios. The most important thing is maintaining the integrity of our balance sheet and our financial ratios and at the same time with these acquisitions we have not diluted our shareholders by issuing any shares.

 We have borrowed money, used our own capital on hand and we have borrowed money long-term for long-term assets and have not acquitted any dilution. And I think that is the main key of where we are going and what should always be for the future. I have no more opening statement and would very much welcome questions from everybody.



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Questions and Answers
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Operator   [1]
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 (Operator Instructions). [Van Carlin], Wells Fargo.

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 Van Carlin,  Wells Fargo Securities, LLC - Analyst   [2]
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 Good morning, how are you? Could you give us some idea of the cost of the debt that you've put on to buy FESIL and Elsner?

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 Michael Smith,  MFC Industrial Ltd. - President & CEO   [3]
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 We have not finished that costing. But we believe that costing will be in the area of 2.55%.

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 Van Carlin,  Wells Fargo Securities, LLC - Analyst   [4]
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 Okay.

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 Michael Smith,  MFC Industrial Ltd. - President & CEO   [5]
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 Term debt. And the tenure will be about seven years I would assume.

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 Van Carlin,  Wells Fargo Securities, LLC - Analyst   [6]
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 Seven years, okay. Thank you.

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Operator   [7]
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 Jeff Geygan, Milwaukee Private Wealth Management.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [8]
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 Good morning Michael. Can you please update us on Pea Ridge?

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 Michael Smith,  MFC Industrial Ltd. - President & CEO   [9]
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 It is still proceeding and I didn't really address it today because I had nothing more new to tell you except that we have no negatives. I guess I could say that. And we are proceeding with the Saudis and it is going along.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [10]
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 All right and as a follow-up you didn't mention anything about changes at the executive level. Will there be such changes such changes with your executive personnel?

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 Michael Smith,  MFC Industrial Ltd. - President & CEO   [11]
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 I think there's one to be a lot of changes overall at MFC. We are lucky here, we have got some new -- with these new acquisitions we have got some good senior management.

 This senior management were not entrepreneurially led. They were executives. So you know always find when we acquire companies over the years, the ones who are entrepreneurs they never survive and you should probably let them go or have an agreement to let them go at the beginning.

 With FESIL an Elsner, we have senior executives and I see them to be a great complement for us. And you know from my position, we are still looking to fill the CEO role. And I am hoping we can do that in the near future.

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 Jeff Geygan,  Milwaukee Private Wealth Management - Analyst   [12]
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 Thank you.

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Operator   [13]
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 Joe Pratt, WFC Asset Management.

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 Joe Pratt,  Wells Fargo Securities, LLC - Analyst   [14]
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 Hi, good morning Michael. Does this in terms of hedging, does this mean you are going to realize $4.39 in 2014 for your gas on average compared to CAD3.46 in 2013?

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 Michael Smith,  MFC Industrial Ltd. - President & CEO   [15]
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 Joe, what happens in reality is that we either make it on the hedge or we make it on the industrial side on the production. So what is really nice here we are 90 million, I got a 90 million guaranteed at $4.39. Jim says -- what does that cost Jim? It is under 1.70 --

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 James Carter,  MFC Industrial Ltd. - CFO   [16]
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 Right now? Our cash cost per Mcf is for 2013, well based on 2013 figures is CAD1.90. And our full costs inclusive of depletion and other non-cash cost, whatever, was $3.81.

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 Michael Smith,  MFC Industrial Ltd. - President & CEO   [17]
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 So let's just talk cash to cash. So I got CAD1.90 versus $4.39. I am quite comfortable on natural gas.

 I wish I had a little bit more on the short side but you know you didn't want to chase it right. And you want to get it so you have a liquid position if you want to cover.

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 James Carter,  MFC Industrial Ltd. - CFO   [18]
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 You should add here to Michael that is a CAD1.90.

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 Michael Smith,  MFC Industrial Ltd. - President & CEO   [19]
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 That is right. When we're talking -- when I talk $4.39, I am talking US. And as Jim is saying his lifting cost or his actual cash cost to get the gas out of the ground is Canadian.

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 Joe Pratt,  Wells Fargo Securities, LLC - Analyst   [20]
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 Well, I guess I am just doing a rough pencil thing where if I look at 50 million cubic feet a day times a spread of $2 times 365 days, I come up with what I would call a manufacturing operating cash, a manufacturing cash flow of say $35 million. In order to calculate an EBITDA, I just don't know what your overheads are. I am trying to come up with an EBITDA in 2014 for Compton.

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 James Carter,  MFC Industrial Ltd. - CFO   [21]
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 I think again we would have to go look at our forecast on that and there are other factors that come in.

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 Joe Pratt,  Wells Fargo Securities, LLC - Analyst   [22]
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 Okay, well I can't imagine you will spend more than say $5 million on interests and $5 million on overhead so that gets me down to an EBITDA north of $20 million. That is just, for the outside analyst using your SEC filings, I don't believe there's any way to compute the EBITDA number for Compton in 2012, 2013 or project one for 2014.

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 James Carter,  MFC Industrial Ltd. - CFO   [23]
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 I think one thing for sure Joe that the G&A at the energy group will be certainly more than $5 million.

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 Joe Pratt,  Wells Fargo Securities, LLC - Analyst   [24]
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 Okay.

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 James Carter,  MFC Industrial Ltd. - CFO   [25]
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 I mean substantially more than that.

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 Joe Pratt,  Wells Fargo Securities, LLC - Analyst   [26]
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 Okay.

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 James Carter,  MFC Industrial Ltd. - CFO   [27]
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 And then you have royalties, government royalties and everything else here.

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 Michael Smith,  MFC Industrial Ltd. - President & CEO   [28]
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 And there is no interest cost, Joe, though.

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 Joe Pratt,  Wells Fargo Securities, LLC - Analyst   [29]
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 Okay, got it. And then the second thing would be do you want to comment on your commodity revenue in 2013 was about $700 million, how do you get it going to $1.6 billion or $1.7 billion?

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 Michael Smith,  MFC Industrial Ltd. - President & CEO   [30]
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 With the two acquisitions, the turnover of FESIL and Elsner should be $700 million, $800 million without any growth.

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 James Carter,  MFC Industrial Ltd. - CFO   [31]
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 The growth is not coming just from energy, Joe. It is coming from the acquisitions as well.

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 Michael Smith,  MFC Industrial Ltd. - President & CEO   [32]
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 And [acquisitions] is just a part of it.

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 Joe Pratt,  Wells Fargo Securities, LLC - Analyst   [33]
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 Okay, thank you very much.

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 Michael Smith,  MFC Industrial Ltd. - President & CEO   [34]
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 Great you are welcome.

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Operator   [35]
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 (Operator Instructions). Okay, this concludes our question-and-answer session. I will now turn the conference back over to Michael Smith.

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 Michael Smith,  MFC Industrial Ltd. - President & CEO   [36]
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 We seriously thank you very much for listening this morning and we encourage you to call with any other questions you have. Call Rene Randall or ourselves and we'd be more than happy to respond in a quick way. And we thank you.

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Operator   [37]
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 This concludes today's conference. Thank you for your participation.

 You may now disconnect. Have a great day.






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