SRL Scully Royalty Ltd

Operator

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.

Kevin McGrath

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 on-demand review for the next seven days. Certain statements in the conference call will be forward-looking statements, which reflects management's expectations regarding future growth, results of operations, 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 turn the call over to Michael to begin the discussion.

Michael Smith

Thank you very much, Kevin. I would 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. 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 giving back some money, 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. That really takes me to what I want to talk to you about now. In January of 2011, in our portfolio, we had a global supply chain company based in Vienna, Austria. We saw that business and said, okay, maybe this is a business that we can grow and we realizing at that point two things. One, it was top line business, requires 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 majority of our assets could be current, we felt much more comfortable with it as far as risk was concerned. 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 revenues. But with the acquisitions that we have just done and which are now completed, and are all now consolidated into accounts as of this quarter, our going forward revenues 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 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 am pleased to say that we have not changed that and I am sure we will not going forward. What 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 have taken these recent subsidiaries in our existing and put them into a brand-new structure, because 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. First of all, I would like to welcome all of our new colleagues at Elsner. We believe that company will make a great complement to us going forward. Definitely a synergy with our operations and of course [inaudible] 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. The most important thing is what you do, so I think we 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. I am very comfortable he can do that. 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 that we have a very, very strong team, but the most wonderful thing is that we have got some top line. We now have a good balance sheet; we have great friends with the bank, some wonderful employees. I think, we can start seeing ourselves to perform much better tomorrow. Let me turn it over now to Jim Carter, and he can give you a financial summary of the quarter.

Jim Carter

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. 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 on 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 had 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. 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. As you see from the table that we provided, we realized approximately $6.06 per MCF. 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 the $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 in 2013, so that was the equivalent of 812,000 BOEs down from 959,000 or approximately 15% decrease. In that regard, however, our total lifting cost for the quarter only increased by approximately $200,000 and our direct costs increased by just $0.5 million, so the increase in the breakeven cost 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 Canadian $3.66 MMCF versus $3.52 in the prior-year. In that regard, as I mentioned 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 [in net] [ph] was $37.6 million versus $30 million in the prior year. 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. Those are pretty well the highlights as far as the financial statements go. If there any questions, I will certainly attempt to answer more. Perhaps, Michael or Rene might be...

Michael Smith

We will go ahead and open it up to question-and-answer now.

Operator

(Operator Instructions) Your first question comes from the line of Joe Pratt from WFC Asset Management. Please proceed.

Joe Pratt

Hi, Michael, good morning.

Michael Smith

Good morning, Joe.

Joe Pratt

Well, I will ask the question. On a pro forma basis, if the two acquisitions have been acquired on January 1, 2014, what would that $17.5 million EBITDA number have been?

Jim Carter

I don't think we have run that number, Joe.

Joe Pratt

Okay. That's my question.

Jim Carter

Okay. Good, Joe.

Joe Pratt

Right. Yes.

Operator

Your next question comes from the line of Doug Weiss from ESW Investment. Please proceed.

Doug Weiss

Hi. Good morning.

Michael Smith

Good morning.

Doug Weiss

Of your $17 million reported EBITDA, $15 million was from Compton if I understood that correctly? Then I guess, if you normalized for the hedging loss and the other one-time expense, EBITDA would have been closer to about $20 million. Is that about right?

Jim Carter

Again, I don't have the exact numbers, but that sounds pretty good.

Doug Weiss

I guess, my question is, and you spoke to this in the introduction is that, most of the EBITDA was coming from comp and 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 EBITDA margin and maybe free cash margin for the supply business?

Michael Smith

I think that would be a very generalized answer. As 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 business is obviously a much more stable business. The markets are now recovering both in Europe and on a worldwide basis. 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.

Doug Weiss

Okay. I mean, maybe that's the best you could do, but my sense is running around like 1% to 2% EBITDA margin at least this quarter.

Michael Smith

Let me say to you, it's definitely a top line business. You know, 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%.

Doug Weiss

EBITDA margin.

Michael Smith

Yes.

Doug Weiss

Okay. All right. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Sean Sweeney from Milwaukee Private Wealth Management. Please proceed.

Sean Sweeney

Good morning. Thanks for taking my call.

Michael Smith

Good morning.

Sean Sweeney

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?

Michael Smith

I can't. I wish I could, but it's I just cannot. You know, Wabush, to me, we wanted to be short-term pain, long-term gain. That's our goal, so if you can appreciate it. It's very sensitive at this point.

Sean Sweeney

Okay. I understand.

Michael Smith

Yes.

Sean Sweeney

Switching gears, are you able to provide an update on the Pea Ridge asset and how we can look at that moving forward?

Michael Smith

Yes. Actually it's going forward, it's on plan. 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 with what we have managed to determine at this point.

Sean Sweeney

Okay. Would you equate that 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.

Michael Smith

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 no news is good news would be a good way of analyzing that particular opportunity.

Sean Sweeney

Okay. Thank you.

Michael Smith

You are welcome.

Operator

Your question comes from the line of George Berman from J.P. Turner. Please proceed.

Michael Smith

Good morning, George.

George Berman - J.P. Turner

Good morning. Sorry for the delay. Thanks for taking my call. In general, I have a question on your valuation. With the massive amount of cash, the huge assets you have in Canada in the oil and gas sector that we bought real inexpensively last year, are there any other moves underway to possibly widen the awareness in the marketplace of MFC Industrial as a company? I have noticed that it seems to be very little following and we have been now for over a year slumped here at about $7 a share, $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.

Michael Smith

George, everything you say, I agree with, but 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, so now we have people, because of our size, and with our balance sheet can focus and I think we have a great President and he is backed up by some very smart people and 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 just got to give us a little bit of time and I think if you could talk to us about that same question on our next conference call, that would be great.

George Berman - J.P. Turner

Okay. Well, you were no slop, you did pretty good I think over the years. I was just thinking that with [inaudible] $1 billion [inaudible] all over the world of different energy companies different this, different there, there is a lot of good possibilities, but there's a lot of questions that (Inaudible) unanswered, and if you change that a little bit I think the market will [inaudible] much, much better validation.

Michael Smith

We are hearing loud and clear, George.

George Berman - J.P. Turner

Okay.

Michael Smith

Thank you.

George Berman - J.P. Turner

You are welcome.

Operator

(Operator Instructions) Your next question comes from the line of Joe Pratt from WFC Asset Management. Please proceed.

Joe Pratt

My question was answered. Thank you.

Operator

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

Michael Smith

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 we will also be available from time-to-time to answer your questions. Thank you.

Operator

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