Scully Royalty Ltd. (SRL) Q1 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the MFC Industrial Ltd. First Quarter 2015 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] On the call today are Gerardo Cortina, President and Chief Executive Officer, Sam Morrow, Chief Financial Officer, and Rene Randall, Vice President. After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note that 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 the company’s 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 20-F with the SEC. Please note this event is being recorded. I would now like to turn the conference over to Mr. Cortina, President and Chief Executive Officer of MFC Industrial. Please go ahead.

Thank you. Welcome everybody to the MFC Industrial investors call. We thank you for being with us this morning. We are only in Vancouver at our Executive office. 45 days ago our Q4 2014 call we presented our plan, ambition for the future. Our plan to grow MFC and enhance shareholders value. Today I would like to go over our plan. The progress we have made and the challenges that we have confronted. This is a medium long-term plan that will bring fundamental changes to our company that sometimes do not go together with other short-term strategies. But we are convinced that this is way to go to increase shareholders value. Our negotiations to partner with a European bank that will become our in-house bank are successfully moving forward. But let me first go briefly over our results. Later on Sam will discuss our financial results in more detail. For Q1 2015, revenue increased $334.5 million, compared to $231.4 million for Q1 2014. This represents 45% increase. This increase was a result of organic growth and overall increase in supply chain revenue and the consolidation of our recent acquisitions. On the other side, revenue was also affected by the decrease in natural gas prices and certain other products and also by the exchange rate fluctuations [ph] between the dollar, against the euro and Canadian dollar. Net income for Q1 2015 was $6.3 million or $0.10 per share, compared to $5.8 million or $0.09 per share for Q1 2014. This represents 8.6% increase. Operating EBITDA was $19.6 million for Q1 2015 compared to $17.7 million over Q1 2014 this represented 10.7% increase. Our balance sheet continues to be strong, cash as of March 31, 2015 was $331 million total assets were $1.4 billion, long-term debt $276 million, an equity of $657 million. As already mentioned in our March 31 call, MFC Energy has been an important part of our business over the last few years. But moving forward, as we plan to allocate as much capital as possible to our supply chain and trade finance business we’re actively talking to interested parties to rationalize these assets. We have this close net book value of the assets we will rationalize. The net proceeds of these assets after repaying the debt incurred to refinance the positions of these assets will be distributed to shareholders as a return of capital with no withholding tax. Based on current market conditions in the oil and gas industry, this process will take some time, where our objective is to maximize returns and therefore, we anticipate an initial distribution to shareholders will be made within 18 months from March 31, 2015, when we made this announcement. The MFC Energy assets that we classified as held for sale in December 2014 will be monetized and redeployed at capital to our trade finance business. We are focused on maximizing the long-term value of our assets and to preserve our natural gas reserves, we have initiated a program to curtail production at certain of our wells. To date this program has reduced our production between 10% to 15%, focused on our properties in central Alberta that produce a higher mix of natural gas liquids. When production of these wells becomes economical, we will resume operations. We believe that this is a program is a prudent action in the environment and it will ensure that our natural gas remains in the ground while maintaining the flexibility to monetize our reserves when attractive pricing resumes. On our Wabush mine there have not been any new developments to report to you at this time. As we have reported before, during 2014 Cliffs closed the mine and until they terminate the lease, they are obligated to pay us a minimum lease payment of C$3.25 million per year. And as of today, we continue to receive our lease payment. Now Sam will talk to you in more detail our financials.

Thanks Gerardo and good morning everybody. Revenues increased to $344.5 million for the three months ended March 31, 2015, compared to $231.4 million in the first quarter of 2014, primarily as a result of the consolidation of two acquisitions in the second quarter of last year, partially offset by the impact of a stronger U.S. dollar versus the Euro and Canadian dollar, as well as lower hydrocarbon pricing. A substantial portion of our revenues are generated in Euros and Canadian dollars to the weakening of these currencies, negatively impacts our top line when transit with U.S. dollars. Costs of sales and services increased to $3.34 million, during the first quarter of 2015, from a $197.5 million for the same period in 2014, primarily as a result of the consolidation of our acquisitions, in the second quarter of last year. SG&A decreased marginally for the first quarter to $17.3 million from $17.4 million in the same period last year, primarily due to the weakening Canadian dollar and Euro versus the U.S. dollar. Finance cost increased to $4.8 million from $3.7 million in the year ago period, as a result of increased borrowings in our supply chain business. Tax expense was $3.5 million in the first quarter, compared to the $1.9 million in the year ago period. We continue to strive to be physically responsible and our income tax paid in cash was $1.5 million, compared to the $1 million last year. Net income to shareholders was $6.3 million $0.10 per share compared to $5.8 million or a $0.09 per share in the same period of 2014. Operating EBITDA increased to $19.6 million from $17.7 million in the year ago period. On to the balance sheet cash increased $331 million from $297 million at December 31. Inventories and accounts receivable both decline to a $194 million and a $138 million respectively from $213 million and a $162 million at December 31. More than 50% of our inventory was sold and priced at March 31, 2015 with the remainder comprised of raw materials, work-in-progress and finished goods of our production facilities, strategic inventories, such as consignment positions and goods in transit. Payables decreased to $96 million from $138 million at December 31, so this was more than offset by an increase in short-term borrowings to $215 million from a $161 million at December 31, 2014. Shareholders’ equity was $657 million or $10.40 per share that’s compared to $670 million or a $10.63 per share at December 31. The decline was due to the translation in the U.S. dollars of our subsidiaries who’s functional currencies and Euro or Canadian dollars, which more than offset our net income for the period. And with that Gerardo, back to you.

Thank you, Sam. Before talking to you again about our plans, ambition for the future, I would like to say that over the last few weeks we have received some subjections [ph] or comments from different investors indicating that based on our current stock price we should look at open market share buyback program as over the short-term will bring the stock price up. But over the medium long-term if there is no fundamental change in the company, stock prices will tend to go back to where they started. As we have seen, we have no other [ph] NYSE-listed companies. It would be great if we could do both, but unfortunately we only have one pocket and even though our cash position, as mentioned before, remains very strong at $331 million. We want to be very prudent on how we manage our cash as there will be in future acquisitions of business or commitments to projects we achieved long-term goals and expanding our assets and earnings. Depending on the size of a transaction, the capital resources that will be required can be substantial. So for now we have decided not to repurchase any shares in the open market. But we will continue to review a convenience of a share repurchase plan in the future. Our main business today is global supply chain sourcing and supplying a wide range of products such as metals, alloys, minerals, chemicals and wood products to different industries around the world and providing a wide range of trade finance solutions to both consumers and suppliers. MFC global supply chain business is active worldwide and constantly [ph] expanding into new geographies to the world of new products and markets. We have so far succeeded in an important growth of our global revenue and this is a fundamental change to be able to succeed in our plan, and our vision for the future. On the supply side, we have been able to expand our secured sources by update, marketing or agency agreements and we’ll continue to do so in order to expand our offerings to the market. We have to date a substantial customer base. Our plan ambition is to grow our trade finance business and improve profit margins by offering new and complete trade finance services and solutions to this established value chain. As mentioned before, we continue to work in our plan to partner with a European bank which will be our in-house bank and this would help MFC expand the trade finance business into a wide range of new services, such as financing, factoring, forfaiting, marketing, and risk management. We presented 45 days of all our plan ambition for the future. Today we presented the progress we have made so for. At MFC we have today a clear and well established plan to grow our revenue and margins. We are making progress, we are in the right path, and we are optimistic about our future. To finalize, I just want to thank you all and our shareholders for their support. Operator, with this we are ready to start the Q&A. Thank you.

Thank you. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. And our first question comes from Joe Pratt from Stifel. Please go ahead.

Hi, good morning, Gerardo.

Good morning, Joe.

Good morning, Joe.

I guess what I’m interested in is, can you give examples of, just one example of maybe in the past six months the acquisition of a new customer and the details of what you’re doing for and I don’t know if you can disclose this or not. But I’m just thinking I have this image that you there is a certain special chemical that’s made in Indonesia and in order to be efficient you want to completely show up above and that boat goes to Mexico and then it’s the raw material for toothpaste for Procter & Gamble at one of their factories in Mexico. And you hold the inventory there in Mexico and a warehouse, until it’s ready or maybe you do some fabrication on it. I am just interested if – just one example of a piece of business that you’re really proud of that you think can a) grow and b) have better margins than historically what you enjoyed?

And thank you, Joe. Let me give you it for an example. You were talking about the detergent industry. Yes, we are very active in the detergent industry, especially in Latin America, where most of the people still use powder detergents, compared to liquid detergents in other parts of the world. Sodium sulphate is the most important raw material for this, so we source the material in China. We work with the suppliers in China to have a fixed price for the year, we log in our vessels, we do the booking of the vessels to get the very competitive freight, and then we have warehousing capacities in different countries, throughout Latin America and then we deliver to our finished customers within very short notices. Another example is a ferrosilicon take off agreement that we have with the Malaysian producer. This is a new project that just started off, it’s working well and we are paying the supplier against delivery of the goods, we are shipping to different destinations. In this case, mainly to Europe, we’re holding the inventory and again delivering to our customers on the very short notices. So these are two examples that will show you the way we operate in our global supply chain business.

Okay.

And of course financing is a big part of this transaction.

Okay and just as a follow-on question, could you give me the names of the companies that would like to take that business away from you?

Well, we have different competitors in different countries in the different markets that we are active starting with all the Chinese. I can probably give you 200 names of Chinese companies that would like take away the business away from us, but based on the services that we are providing, the financing that we are providing, they are not able to provide the services to our customers. So the services that we are providing is really the competitive advantage that we can offer the market.

Okay, all right. Thank you and then just a last point, is this – do companies like no Noble and Glencore avail, so is this one of the main parts of their businesses?

Yes, but they are more in the commodity type of products that we are not. We are more into niche markets, we are more into offering services to our customers and we are not really interested in competing with Glencore’s the novels in iron ore or the any of these type of products.

Okay. Thank you for answering these questions.

Welcome.

Thank you, Joe.

Thanks, Joe.

Our next question comes from Gregg Abella from Investment Partners Asset Management. Please, go ahead.

Good morning, guys.

Good morning.

Good morning, Gregg.

With respect to disagree – you agree or disagree with respect to share buybacks, but to press on to a different question. So you mentioned in the past that you intended to get the story out to Wall Street in a more consorted way. Can you describe what you’ve lined up in that regard and when you intend make such presentations?

Rene would you like to answer this please?

Sure. We’re going to start on the road on the 26. We’re going to spend two days in New York, one day in Boston and one day in Chicago.

Okay, I mean apart from that road show is it something that you intended to do on more frequent basis, because this is I mean it is…

It is, yes, we’ve hired a New York base PR [ph] firm. And we’re going to – I’ve have been meeting with them in the past and I’m – when I’m in New York, I’m going to meet with them again and we’re going to start of strategy where we have a little bit more communications with the investment community on a regular basis.

Okay.

And also go on the road little bit more, now that management is settled in. We’re going to spend hopefully a lot more time on the road.

This is just a start in our mind, Gregg.

Okay, fair enough. Better communication usually correlates to higher share prices I think.

I agree.

And our next question will come from Graham Tanaka from Tanaka Capital Management. Please, go ahead.

Hey, guys.

Good morning Graham.

Just a few things…

Good morning.

On the tax rate, could you explain what’s going on there we historically MFC has enjoyed a much lower tax rate. So if you can explain what’s going on there and what might happen for the year? Thanks.

Sam, can you please answer that please.

Sure, so in the first quarter Graham we had some intercompany transactions which resulted in the utilization of some net operating losses. In addition, right now we have some taxable jurisdictions where we’re able to utilize some deferred tax assets. Also in the first quarter we had a gain on sale in which we had a non-cash tax impact, as well. So I really think the important thing to focus is the cash taxes that we’re paying and the tax cash taxes in the first quarter was $1.5 million versus $1 million year ago and that’s something that we are striving to improve up on.

And what was the gain on sales? What was the nature of gain sale?

We saw some non-core hydrocarbon properties in Alberta.

How large was the gain?

It was $7 million gross in that, there was about a $1 million tax impact on that as well.

All right, there was a $7 million – pre-tax gain or sale, the revenues?

There was a pre-tax gain of $7 million.

And what are you estimates now, you’re getting a better feel for sort of a range of what you might be able to obtain on the value of the assets that you would be liquidating. Thanks.

No Graham, at this time we’re not really, we can’t give you a number, we are looking at different options, we are talking to different interested parties. What as I mentioned before, I mean natural gas prices are at the low level today. We don’t want to rush into making a decision. So we are – that’s why we are looking at the 18-month period in which we would be able to sell these assets.

All right. And to what extent has the decline in oil prices affected this timing or the value assets. Thanks.

Well its interesting, when prices are low, people want to buy, so we have received a lot interested parties, but again we want to wait because we still feel that we have good assets, we will wait until we think that we have the right transaction that we’ll bring back shareholders value to us.

Great. And the remaining assets that you’re going to be utilizing going forward, can you give us any kind of a range of revenue expectations or goals for this year, thanks?

You mean on the [indiscernible] gas assets?

For the total company what do you expect, you don’t have any Wall Street earnings or revenue estimates public. So I was just wondering if you could give us any kind of guidance on what the revenues for MFC might be for this fiscal year?

So, Graham we haven’t provided guidance in the past and a lot this has do just what the exchange rate is going to end up for the year. With the weaker Euro and Canadian dollar or U.S. dollar denominated revenues are more uncertain, but so for today we would preferred not to provide any type top line guidance, but you come back into what we reported for the natural gas properties in Q1 and the rest of that revenue would be ongoing business.

Yes and I would like to add that most of our global supply chain companies performed well during the quarter, which result about the what we had in our budget. But due to natural gas prices our subsidiaries on this business showed a loss that affected our overall revenue. But we have seen a slight increase in gas prices over the last few weeks. And if tendency keeps on we will be showing an improvement in our overall revenue in the coming quarters.

And what where your realization, average realization per mcf for nat gas in the first quarter?

Excuse me, can you repeat that?

Yes what kind of average realizations did you receive for your natural gas sales in the first quarter and that compared with the fourth quarter, thanks?

Hold on a second.

Just give me one minute, Graham.

Sure.

If you go to the next question I can come back to you. Just one moment.

What was the effect of the foreign currency, that might be another Sam question, sorry. But what was the effect of foreign currency in the quarter? And do you have any kind of rule of sum of what a change in the dollar versus the Euro, the Canadian dollar, the U.S. dollar versus the other two with due to earnings per share of revenue, thanks?

Over that quarter our foreign – we had a foreign exchange gain of $1.3 million.

A gain of $1.3 million.

Yes.

How that have occurred?

Well we have different positions in the different companies, different exchange rate positions in different companies at the end we have a gain.

Because the dollar strengthen, right. So assumedly the Canadian – the Euro and the Canadian dollar would have hurt on our translation basis back in the U.S. dollars, right? Did you hedge or you, it was a…

Right so Graham, we ended up showing a transaction gain of $1.3 million. The reason for that was our power plant loan in euro denominated and it is held by Canadian subsidiary. So we would have shown a transaction gain there. That alone is completely hedged to Canadian dollars, so there would have been an offsetting loss from a derivative within our cost of sales. So when it comes to the impact of a weakening euro on our revenues, it’s not something that we specifically broken out, but the euro was weaker by more than 10% in the first quarter. So it’s come back a little bit in Q2, but it’s not something that we’ve specifically broken out.

All right, so just to give us a rough feel for going on a go-forward basis, if the euro went up 10%, would that then hurt earnings or help earnings?

So all of our transactions are hedged, right? So it’s always in a constant currency basis.

Yes.

So for our euro denominated subsidiaries, they will hedge their transactions to euro and so I suppose the net income then would be lower by whatever that exchange is. But in certain circumstances, we’re hedging to dollars, and in certain circumstances we’re hedging to Canadian dollars, it really depends on the transaction. So to say it would have a lower or higher impact on a consolidated basis, it’s difficult to say.

So there is not a bias in one direction or another, it just really is going to be fluctuating.

Exactly, and our realized prices Graham per mcf it was $2.97 and that’s Canadian dollars in the first quarter for natural gas.

What was it in the fourth quarter just to get a reference about product?

I don’t have the fourth quarter in front of me, but it was up $6 in the first quarter of last year. So you can see on a year-over-year basis it was a very significant change.

Okay. Thank you.

Thank you.

Our next question comes from George Burmann from JP Turner and Company. Please go ahead.

Good morning, thanks very much for taking my call. I’ve got a question related to tie up that you are looking for with a European financial institution. Can you in layman’s term explain how much that would help your margins in your commodity trading operations?

Yes, thank you George. Look, our gross margin, just to give you an idea of where we are today, in Q1 2014 was $17.8 million [ph], excuse me, 13.8% the gross margin, and Q1 2015 was 8.5%. So we have seen a decrease in our margins. The reason for this is that with our two recent acquisitions, that bring substantial increase in revenue, but this revenue is basically in Western Europe, where competitive prices, especially in steel and foundry industries bring our margins down. So when we are looking at the bank, we are at the partnership with a bank, we are looking at bringing new financing solutions to our customers of suppliers. We have been out of our Vienna office providing this structure finance solutions to customers over many, many years. And we see an opportunity for MFC to really expand in this business in structure finance solution business that will certainly help in improving our margins. Today, I still cannot give you a number, where we see our margins, where we clearly see that we will be able to improve them.

Okay and the way this is going to work is you’re not going to buy a bank, but you are going to associate closely with an existing bank.

Well, we are looking at different possible transactions, we have not defined yet the way to go, but we will be able to hopefully finalize this over the next months.

Okay.

And define the structure of how we’re going to operate.

Great, any update on your power plant in Africa?

Sam, would you like to?

And no real update there, but there is about $0.7 million of revenue in the first quarter from that facility.

And I think you are expecting the facility to start producing electricity and see that into the national grid there, right?

Sorry, did you say Africa or Alberta?

Africa.

Yes, Africa that facility has been supplying electricity for quite a while, because the plant is not operational. So it’s all now going into the grid.

Okay, is this like an asset that we might sell or exploit further?

One of those, yes.

Okay and I’ve got another question on the currency situation, since you incur – you acquired the silicon companies – silica companies in Norway and I guess, Spain, your cost of sales essentially is in Euros, I assume that the sales of the products are based in dollars, wouldn’t that give you an extra profit there?

So the function of currency of the Norwegian company is Euros, the majority of their costs are Euro-denominated, for ferrosilicon smelter, or it smelters the way that we have. The furnaces have very long-term power contracts and those power contracts are Euro denominated. That matches with our sales, the majority of our sales from Norway are actually Euro denominated. We have some Yen denominated sales and some dollar denominated sales. But we’re always hedging up the margin. We don’t want to take any type of foreign currency risk there, we want to be producers of ferrosilicon, we don’t want to be speculators on the currency.

Okay and in your press release presentation, you essentially come up with about a $100 million asset sales and return of capital to shareholders. If everything works out, you mentioned the time from about what 18 months, then you say you have some other possible asset rationalization asset sales on hand that would be used to reduce liabilities. Can you explain a little bit, what exactly you plan on doing with the assets in Canada that you bought at a very good price? With rising commodities prices, it seems to me that the value is going in the right direction for us, again.

Well as I mentioned MFC Energy has been an important business for us over several years, but moving forward, we plan to allocate as much as possible of our capital to structure finance and our global supply business. This is where we see the strength of the company. And the gas business, it is a different business it has been a good business for MFC. But we have defined our plan, we have defined our vision and gas is not included in this plan or visions. So this is the reason why we plan to rationalize these assets and invest farther in our trade finance and global supply chain business.

Okay, so if the right offer came along, you would sell the whole thing.

Excuse me.

If the price is right we would sell anything.

Yes.

Okay. Can you give us any further clarity on the situation with the Wabush mine and Cliffs? You mentioned that they can give it back to you and then you have the right to acquire various property plant and the equipment there. Given that that might happen, what are your plans, would you hire someone to run the mine or maybe run it yourself?

Well, as I said already in our initial remarks, there is no new development, Cliffs cancelled, stop operating the mine in 2014, they still have not cancelled the lease, so they keep playing the minimal royalty. Once they cancelled the lease, you’re right, we have step-in rights and we are open, we’ll have to evaluate all the different alternatives in front of us, and that time we’ll have to make a decision, how we would want to move forward.

Okay, okay, thanks very much.

Thank you.

I just want to step in quickly, so an answer to Graham’s question earlier in Q4 of 2014, our realized gas prices were CAD$3.85 per mcf, and then CAD$2.97 in Q1.

And this will conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

Thank you. Well, thanks everybody for being in our call today. As we have stated we have a well established plan to grow the revenue and margins of our company. The plan is in progress and we are optimistic. Thank you, for being with us today. Good bye.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.