Q1 2014 MFC Industrial Ltd Earnings Conference Call

May 15, 2014 AM EDT
MFCB - Mfc Bancorp Ltd
Q1 2014 MFC Industrial Ltd Earnings Conference Call
May 15, 2014 / 02:00PM GMT 

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Corporate Participants
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   *  Kevin McGrath
      Cameron Associates, Inc. - IR
   *  Michael Smith
      MFC Industrial Ltd. - President and CEO
   *  Jim Carter
      MFC Industrial Ltd. - CFO

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Conference Call Participants
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   *  Joe Pratt
      Wells Fargo Securities, LLC - Analyst
   *  Doug Weiss
      ESW Investment - Analyst
   *  Sean Sweeney
      Milwaukee Private Wealth Mangement - Analyst
   *  George Burmann
      J.P. Turner & Company, LLC - Analyst

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Presentation
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Operator   [1]
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 Good day, ladies and gentlemen, and welcome to the first-quarter 2014 MFC Industrial earnings conference call. My name is Kim, and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (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, Inc. - 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 financial results for the three-month period ended March 31, 2014. 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 the on-demand review for the next seven days.

 Certain statements in this conference call will be forward-looking statements which reflect management's 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 the 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.

 With that said, I would now like to turn the call over to Michael to begin the discussion.

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 Michael Smith,  MFC Industrial Ltd. - President and CEO   [3]
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 Thank you very much, Kevin. I'd like to start out this morning just to give you a brief history of MFC, which I think is relevant to what we are trying to achieve today. So over the last 20, 30 years what we have tried to achieve is to create some shareholder value and either dividend out those shares or those subsidiaries or assets to our shareholders and from time to time maybe give them back some money or -- but either way, try and create some value.

 That has worked. It hasn't always been successful, but it has worked. And we've had some good successes and some not so wonderful successes. And that really takes me to what I want to talk to you about now. In January 2011, in our portfolio we had a global supply chain company based in Vienna, Austria. And we saw that business and said okay, maybe this is a business that we can grow. And we realizing at that point to things. One, it was a top-line business, required substantial sales to really have an effective bottom line. And, two, that business met our criteria where it didn't require a tremendous amount of fixed assets. So all of our assets could be -- or a majority of our assets could be current. We felt much more comfortable as far as risk was concerned.

 And when you take us to where we are today, in 2013 we had revenues of $814 million. In 2012 we had revenues of $486 million in revenue. But with the acquisitions we have just done and which are now completed and are all now consolidated into our accounts, as of this quarter our going forward revenue should be approximately $1.6 billion. To me, we are now starting to get that top-line business and that criteria which is so important to make this a good success.

 One of the things we have done with these acquisitions to get us to this point is we've kept our historical policy of not to dilute our shareholders by issuing new shares. And also at the same time we are maintaining our discipline with our balance sheet and our financial ratios. To us that was a very, very important policy, and I'm pleased to say that we have not changed that and I'm sure we will not, going forward.

 So what do we end up with? We end up with a very good foundation now. We have great banks who are very supportive with us. We have employees in many different parts of the world who have great experience in many, many areas. In China we have a very solid operation now because we've taken these recent subsidiaries we have existing and put them into a brand-new structure. And it gives us great new opportunities in that particular market.

 And I think it's interesting to see how we can all work together. I'll get into what we need to make sure the integration works in a minute. But first of all I'd like to welcome all of our new colleagues at Elsner. We believe that company will make a great compliment to us going forward, definitely a synergy with our operations. And, of course, the FESIL operation -- we want to welcome them as well. As those people give us some great talent and at the same time, hopefully, we can both learn from each other.

 But the most important thing is what do you do. So, I think we've focused and said what we need is a new management leadership team. And I think today it's so good that we have -- at the end of this meeting today Gerardo Cortina will now become the President and CEO of the Company. And he will be responsible for driving this Company forward. And I'm very comfortable he can do that.

 And together with Sam Morrow, his Deputy, he can give him some great help on the commercial side. And we have Mr. Steinbauer, who is now officially the Treasurer of our Company. And between the three of them and our new CFO, Jim Carter, I can see going forward we have a very, very strong team. And I think the most wonderful thing is that we've got some top line. We now have a good balance sheet. We have great friends with the bank, some wonderful employees, and I think we can, servicing ourselves, perform much better tomorrow.

 But let me turn it over now to Jim Carter, and he can give you a financial summary of the quarter.

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 Jim Carter,  MFC Industrial Ltd. - CFO   [4]
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 Thank you very much, Michael. Good morning, ladies and gentlemen. I'll give you brief highlights of the results for the quarter and our financial position and then obviously, if there are any questions following that, we will attempt to answer them.

 As you see from our income statement, we realized total net income for the quarter of $5.8 million. Unfortunately, this was net of losses, two relatively significant ones. One was on Forex transactions of approximately $3.8 million as well as an unrealized loss on our hedge position of $3.1 million that was recognized in the period. That hedge loss, by the way, has been substantially recovered since, and it's in the order of about $1.4 million today.

 On the positive side we had realized EBITDA of $17.7 million at the end of March. We have working capital of $400 million versus $396 million in the prior year. Our working capital ratios [held] were approximately 2.0, and the equity per share was $11.01. Our long-term debt to equity ratio was 0.34. And at March 31 we had cash and cash equivalents on hand of $356 million and our credit facilities available to us -- they aggregated $608 million.

 We had a very good quarter as far as our MFC Energy, the former Compton Petroleum, through our gas prices. And as you see from the tables that were provided, we realized approximately $6, $6.06 per MCF, and that was up from $3.41 per MCF for the quarter in the prior year.

 Our net back on a BOE basis was $22.53 for the quarter, and that was versus $13.77 in 2013. In that regard, MFC Energy's cash flow breakeven natural gas price for the quarter was $2.42 versus $1.67 for the prior year. However, this was entirely due to a reduction in production in this year to 4.1 MMCF versus 4.9 MMCF 2013. So that was the equivalent of 812,000 BOEs, down from 959,000 BOEs or approximately a 15% decrease.

 In that regard, however, our total lifting costs for the quarter only increased by approximately $200,000, and our direct costs increased by just under $0.5 million. So the increase in the breakeven costs in the prior year is directly attributable to the decrease in production. On a full accounting basis, which is inclusive of depletion and other non-cash costs, our operating breakeven price in Q1 was CAD3.66 an MCF versus CAD3.52 in the prior year.

 In that regard, as I mentioned, because of -- in particular, because of unseasonably cold weather in Alberta in late January and early February, prices rose into the mid-20s and for a couple of days were actually over $30 an MCF. So in that regard, our revenue for Q1 was $37.6 million versus $30 million in the prior year. And our net income before tax was approximately $10 million in this year versus about $200,000 in the last year. That resulted in EBITDA of about $15 million in Q1, which was about double what it was in the prior year.

 So those are pretty well the highlights as far as the financial statements go. And if there are any questions, I will certainly attempt to answer them or perhaps Michael or Rene might be able to.

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Unidentified Company Representative   [5]
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 We will go ahead and open it up to question and answer now.



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Questions and Answers
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Operator   [1]
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 (Operator Instructions) Joe Pratt from WFC Asset Management.

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 Joe Pratt,  Wells Fargo Securities, LLC - Analyst   [2]
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 Hi, Michael. Good morning.

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 Michael Smith,  MFC Industrial Ltd. - President and CEO   [3]
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 Good morning, Joe.

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 Joe Pratt,  Wells Fargo Securities, LLC - Analyst   [4]
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 Well, I'll ask the question. If the two acquisitions -- on a pro forma basis, if the two acquisitions had been acquired on January 1, 2014, what would that $17.5 million EBITDA number have been?

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 Michael Smith,  MFC Industrial Ltd. - President and CEO   [5]
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 I don't think we've run that number, Joe.

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 Joe Pratt,  Wells Fargo Securities, LLC - Analyst   [6]
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 Okay. Okay, that's my question.

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Operator   [7]
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 [Doug Weiss from ESW Investment].

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 Doug Weiss,  ESW Investment - Analyst   [8]
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 So of your $17 million reported EBITDA, $15 million was from Compton, if I understood that correctly? And then if you normalize for the hedging loss and the other one-time expense, EBITDA would have been closer to around $20 million. Is that about right?

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 Jim Carter,  MFC Industrial Ltd. - CFO   [9]
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 Again, I don't have the exact numbers. But that sounds pretty good.

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 Doug Weiss,  ESW Investment - Analyst   [10]
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 So I guess my question is -- and you spoke to this in the introduction -- is that most of the EBITDA is coming from Compton. The supply business is running at very low margins. Do you have a goal or some additional guidance you can give on what the potential is in terms of a EBITDA margin and maybe a free cash margin for the supply business?

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 Jim Carter,  MFC Industrial Ltd. - CFO   [11]
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 I think that would be a very generalized answer. But it was a fortuitous quarter, obviously, in the energy sector as far as prices went. And of course, that resulted in the increased EBITDA. The commodities trading businesses is obviously a much more stable business. The markets are now recovering both in Europe and on a worldwide basis. And now, with the addition of our two new companies, we anticipate, obviously, that's going to contribute significantly to both margins and EBITDA. But we don't have any estimates at this point in time.

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 Doug Weiss,  ESW Investment - Analyst   [12]
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 Okay. Maybe that's the best you can do. But it seems -- my sense is it's running around at like a 1%, 1% to 2% EBITDA margin, at least this quarter.

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 Michael Smith,  MFC Industrial Ltd. - President and CEO   [13]
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 Let me say to you it's definitely a top-line business. And when we started out, we started out very small. And now we have a chance to expand that top line, and the top line now can be substantial. Our competitors run with a margin of about 3%.

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 Doug Weiss,  ESW Investment - Analyst   [14]
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 EBITDA margin?

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 Michael Smith,  MFC Industrial Ltd. - President and CEO   [15]
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 Yes.

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 Doug Weiss,  ESW Investment - Analyst   [16]
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 Okay. All right, thank you.

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Operator   [17]
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 (Operator Instructions) Sean Sweeney from Milwaukee Private Wealth Management.

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 Sean Sweeney,  Milwaukee Private Wealth Mangement - Analyst   [18]
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 Can you provide just a little bit more color on the dialogue you are having with other stakeholders in order to rationalize the asset at Wabush?

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 Michael Smith,  MFC Industrial Ltd. - President and CEO   [19]
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 I can't answer that. I wish I could, but I just cannot. You know, Wabush to me -- we want it to be short-term pain, long-term gain. That's our goal. So as you can appreciate, it's very sensitive at this point.

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 Sean Sweeney,  Milwaukee Private Wealth Mangement - Analyst   [20]
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 Okay, I understand.

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 Michael Smith,  MFC Industrial Ltd. - President and CEO   [21]
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 Yes.

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 Sean Sweeney,  Milwaukee Private Wealth Mangement - Analyst   [22]
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 Just switching gears, are you able to provide an update on the Pea Ridge asset and how we can look at that moving forward?

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 Michael Smith,  MFC Industrial Ltd. - President and CEO   [23]
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 Yes. I think it's going forward, it's on plan. I don't think -- from a time perspective, don't look for us to produce a report this year that will get everybody jumping up and down. But we see no negatives at this particular point. And we are quite happy, we are quite happy with what we have managed to determine at this point.

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 Sean Sweeney,  Milwaukee Private Wealth Mangement - Analyst   [24]
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 Okay. Would you equate that to sort of a no news is good news, or should we be looking for, like you said, a report within the next, let's say, 12 to 18 months?

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 Michael Smith,  MFC Industrial Ltd. - President and CEO   [25]
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 As you know, in this industry we have many things that tie our hands with regulatory requirements as far as disclosure. But I definitely would use that no news is good news would be a good way of analyzing that particular opportunity.

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 Sean Sweeney,  Milwaukee Private Wealth Mangement - Analyst   [26]
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 Okay, thank you.

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Operator   [27]
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 George Burmann, J.P. Turner.

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 George Burmann,  J.P. Turner & Company, LLC - Analyst   [28]
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 In general, I have a question on your valuation. With the massive amount of cash, the huge assets you have in Canada now in the oil and gas sector that we bought real inexpensively last year, are there any other moves underway to possibly brighten the awareness in the marketplace of MFC Industrial as a company? I have noticed that there seems to be very little following. And we have been now for over a year slumped here at about $7, $8 a share, substantially below book value. And opportunities are -- abound. It would seem to me oftentimes deals can be done as a public company when you can use your stock as currency. And if the market doesn't afford you that process, sometimes you go in and you buy in your stock and achieve higher valuations there.

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 Michael Smith,  MFC Industrial Ltd. - President and CEO   [29]
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 George, everything you say I agree with. I think the most important thing today was that we created two things. We've created enough top-line revenues so we can say we have a business and the business here can produce some good profits if it's managed right.

 But on top of that we have now just appointed a full management team. And before, I managed everything, which was quite foolish. And so now we have people, because of our size and with our balance sheet, who can focus. And I think we have a great President. And he's backed up by some very smart people in the Deputy CEO, and we have a chief financial officer. We have put the pieces into place where we can now, I think, with respect, go forward to the capital markets.

 So I think you've just got to give us a little bit of time. And I think this -- if you could talk to us about that same question on our next conference call, that would be great.

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 George Burmann,  J.P. Turner & Company, LLC - Analyst   [30]
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 Okay. Well, you were no slouch. You did pretty good, I think, over the years. I'm just thinking that with revenues approaching $1 billion and a vast empire all over the world (technical difficulty) energy companies (inaudible) from there, there's a lot of good possibilities. But there's a lot of questions (inaudible) remain unanswered. And if you can change that a little bit, I think the market will before you are much, much better valuation.

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 Michael Smith,  MFC Industrial Ltd. - President and CEO   [31]
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 We are hearing you loud and clear, George. Thank you.

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 George Burmann,  J.P. Turner & Company, LLC - Analyst   [32]
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 You're welcome.

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Operator   [33]
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 (Operator Instructions) Joe Pratt from the WFC Asset Management.

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 Joe Pratt,  Wells Fargo Securities, LLC - Analyst   [34]
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 My question was answered. Thank you.

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Operator   [35]
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 Ladies and gentlemen, this concludes our question-and-answer session. I will now turn the call back to Mr. Michael Smith.

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 Michael Smith,  MFC Industrial Ltd. - President and CEO   [36]
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 We thank you very much for dialing in and talking to us today. And we do encourage you, if you have any further questions, to contact us.

 We are very pleased with our new management and they will also be available from time to time to answer your questions. Thank you.

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Operator   [37]
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 Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.






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