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MFC Bancorp Ltd. Reports Results For The Three And Six Months Ended June 30, 2016

08/15/2016

NEW YORK, Aug. 15, 2016 /PRNewswire/ -- MFC Bancorp Ltd. (the "Company") (NYSE: MFCB), a merchant bank with diversified finance and supply chain operations and other investments, announces its results for the three and six months ended June 30, 2016 and provides an update on its recent corporate developments. The Company's financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS"). (All references to dollar amounts are in Canadian dollars unless otherwise stated.)    

In the first six months of 2016, our revenues decreased to $676.2 million from $770.7 million in the same period of 2015, while our net income from continuing operations for the first half of 2016 decreased to $0.7 million, or $0.01 per diluted share, from $11.7 million, or $0.19 per diluted share, in the same period of 2015.

We are disappointed with these results which reflect too much capital invested in assets which are not generating satisfactory returns. For this reason, we are rationalizing these underperforming assets to reinvest the proceeds into projects and areas that are more productive.

In the first half of 2016, we reduced our inventories by more than $90.6 million, from $245.3 million to $154.7 million, as a result of exiting certain product lines and geographical markets, as well as certain strategic changes related to inventory management. While our trade receivables increased, partially offsetting this inventory reduction, much of this is a timing issue which we expect to reverse in the coming quarters as collections occur.

Sale of Fesil Rana Metall AS

In August 2016, we entered into an agreement to sell our interests in Fesil Rana Metall AS ("Fesil Rana") (Norwegian ferrosilicon plant) and Nor-kvarts (Spanish quartz quarries) to Elkem AS ("Elkem"), one of the world's leading companies for environmentally responsible production of materials such as silicon, ferrosilicon, foundry alloys, carbon materials and microsilica. The consideration is cash approximately equal to net asset value, subject to certain adjustments between the parties related to the profitability of Fesil Rana before closing. Elkem will also purchase all of our Fesil Rana ferrosilicon inventory for fair market value upon closing. Closing is subject to customary closing conditions such as regulatory approvals.

Hemodialysis in China

As a result of our long-term historical success operating in the medical services business in China, we are pleased to announce that our wholly owned subsidiary, Mednet Nephrology Group Ltd. ("Mednet"), is entering the outpatient hemodialysis market in China, the country with the most diabetics in the world. We believe that this market has attractive characteristics that we can realize upon, utilizing our proven strategy of collaborating with medical clinics and other medical centers.

Despite there being over two million End Stage Renal Disease ("ESRD") patients in China, only about 300,000 of them undergo regular hemodialysis treatment, partially as a result of a lack of treatment centers and the China National Kidney Foundation has estimated a treatment rate of only 15%. Further, the number of ESRD patients is growing.

The number of patients with diabetes and hypertension in China is increasing sharply. Hypertension has increased from 160 million to over 300 million patients since the beginning of the 21st century. Adult diabetes patient numbers have reached 92.4 million, increasing by an average of 3,000 new patients per day and 1.2 million new patients per year. The average life expectancy of an ESRD patient without dialysis is one to two years, which with dialysis is increased to five to ten years. It is estimated that about 10% to 20% of diabetes patients and 10% of hypertension (abnormally high blood pressure) patients will develop ESRD, according to the Chinese Center for Disease Control and Prevention.

Update on Realizations Relating to a Former Customer

As previously reported, one of our customers experienced financial difficulties and, in the first quarter of 2016, filed for insolvency. This was an adjusting subsequent event under IAS 10, Events after the Reporting Period, for our year ended December 31, 2015 and, as a result, in connection with the preparation of our audited consolidated financial statements for the year ended December 31, 2015, we had to determine an allowance for credit losses against our receivables due from this former customer and its affiliates and evaluate all other exposures. As a result, in the fourth quarter of 2015, we recorded total credit losses and provisions of $51.4 million related to this former customer and its affiliates, which included an allowance for trade receivables of $10.7 million and provisions of $40.7 million for potential future losses related to guarantees we provided relating to certain prepayment loans made by third-party banks to this former customer to finance off-take contracts for which we were the off-taker. However, we hold various collateral, including guarantees, mortgages and other mitigation securities to recover a significant portion of these losses. We are exercising our rights as we undertake various options to maximize our recoveries. In the second quarter of 2016, we recognized a gain of $35.1 million related to this former customer as a result of recoveries which resulted in the reversal of previously recognized credit losses. However, to be prudent, we have taken an unallocated reserve related to this former customer of $33.3 million.

Financial Highlights

As of June 30, 2016, cash and cash equivalents increased to $213.5 million from $197.5 million as of December 31, 2015. We have made progress in reducing our inventories. Inventories were $154.7 million as of June 30, 2016, compared to $245.3 million as of December 31, 2015. Trade receivables increased from $151.2 million as of December 31, 2015 to $184.4 million as of June 30, 2016. The increase in trade receivables was primarily as a result of a reduction of inventories and other factors which we expect to reverse in the coming quarters. Credit risk from trade receivables is substantially mitigated through credit insurance, bank guarantees, letters of credit and other risk mitigation measures.

The following table highlights selected figures on our financial position as at June 30, 2016 and December 31, 2015:


June 30,


December 31,


2016


2015


(In thousands, except ratio and
per share amounts)

Cash and cash equivalents

$       213,477


$         197,519

Short-term securities

12,961


170

Trade receivables

184,352


151,229

Tax receivables

19,790


11,705

Other receivables

52,134


14,727

Inventories

154,703


245,345

Total current assets

765,508


785,850

Total current liabilities

459,526


414,562

Current ratio(1)

1.67


1.90

Total assets

987,841


977,351

Short-term bank borrowings

184,282


60,103

Long-term debt

236,481


259,038

Long-term debt-to-equity(1)

0.44


0.47

Total liabilities

639,148


608,151

Shareholders' equity

346,329


367,192

Net book value per share

5.48


5.81





Note:

(1)

The current ratio is calculated as current assets divided by current liabilities and the long-term debt-to-equity ratio is calculated as long-term debt, less current portion divided by shareholders' equity.

 

For the second quarter of 2016, our Operating EBITDA from continuing operations decreased to $9.1 million from $12.9 million for the same quarter of 2015.

Operating EBITDA from continuing operations is defined as income from continuing operations before interest, taxes, depreciation, depletion, amortization and impairment. Operating EBITDA from continuing operations is a non-IFRS financial measure and should not be considered in isolation or as a substitute for performance measures under IFRS. Management uses Operating EBITDA from continuing operations as a measure of our operating results and considers it to be a meaningful supplement to net income as a performance measure, primarily because we incur depreciation and depletion from time to time.

The following is a reconciliation of our income from continuing operations to Operating EBITDA from continuing operations.


Three Months Ended
June 30,


2016


2015

Operating EBITDA from continuing operations

(In thousands)

Income from continuing operations(1)

$            561


$       6,065

Income tax expense(2)

1,999


880

Finance costs

4,766


4,562

Amortization, depreciation and depletion

1,727


1,382

                Operating EBITDA from continuing operations(3)

$         9,053


$     12,889






Notes:

(1)

Includes net income attributable to non-controlling interests.

(2)

The income tax paid in cash, excluding resource property revenue taxes, during the second quarter of 2016 was $0.7 million, compared to $1.1 million in the same quarter of 2015.

(3)

There were no impairments for continuing operations in the three months ended June 30, 2016 and 2015.

Credit Lines and Facilities with Banks

We established, utilized and maintain various kinds of credit lines and facilities with banks and insurers. Most of these facilities are short-term. These facilities are used in our day-to-day finance and supply chain business. The amounts drawn under such facilities fluctuate with the kind and level of transactions being undertaken. 

As at June 30, 2016, we had credit facilities aggregating $776.3 million comprised of:  (i) unsecured revolving credit facilities aggregating $369.6 million from banks. The banks generally charge an interest rate of inter-bank rates plus an interest margin; (ii) revolving credit facilities aggregating $98.6 million from banks for structured solutions, a special trade financing. The margin is negotiable when the facility is used; (iii) a non-recourse specially structured factoring arrangement with a bank for up to a credit limit of $244.5 million for our supply chain activities. We may factor our receivable accounts upon invoicing at the inter-bank rate plus a margin; (iv) foreign exchange credit facilities of $37.1 million with banks; and (v) secured revolving credit facilities aggregating $26.5 million.

All of these facilities are either renewable on a yearly basis or usable until further notice. Many of our credit facilities are denominated in Euros and, accordingly, such amounts may fluctuate when reported in Canadian dollars.

We reduced and eliminated certain customer-specific credit facilities for customers with whom we no longer commercially transact, as well as certain credit facilities which were underutilized or in jurisdictions which we are exiting. We continue to evaluate the benefits of certain facilities that may not have strategic long-term relevance to our business and priorities going forward and may modify or eliminate additional facilities in the future. We do not anticipate that this will have a material impact on our overall liquidity.

In addition, we have margin lines with availability at multiple brokers which enable us to hedge industrial products.

Comparison of Book Value to Trading Price of our Shares

On August 12, 2016, our share price closed at US$2.23 which represents a 47% discount to our book value.


As at June 30, 2016


Shareholders'
Equity


Equity
Per Share


Price(1)
to Equity


(In thousands, except per share and ratio amounts)

Working capital

$       305,982


$          4.85



Long-term debt, less current portion

(153,498)


(2.43)



Other long-term assets

222,333


3.52



Other long-term liabilities(2)

(28,488)


(0.46)



Shareholders' equity

$       346,329


$           5.48


0.53







Notes:

(1)

Closing price of US$2.23 converted to Canadian dollars on August 12, 2016, being $2.89.

(2)

Includes non-controlling interests.

 

One issue that we face is that a small number of shareholders control approximately fifty five percent (55%) of all of our shares. This causes our shares to trade with both a minority discount and a liquidity discount from their intrinsic value. Until this is resolved, we do not believe that our shares will trade with any real liquidity, which is a major driver to reducing the valuation discount. Without liquidity, our shares will not be attractive to investors except to special interest groups.

We are considering a number of possible actions to resolve this situation in a way that is beneficial to all of our stakeholders, and believe that over time our actions will cause the price of our common shares will merge with intrinsic value.

President's Comments

Gerardo Cortina, President and CEO of the Company, commented: "I am pleased to announce that to date we have made substantial progress in our ongoing plan to rationalize underperforming assets by exiting certain product lines and geographical markets and reducing capital employed in our business.  In the first six months of the year, we reduced our inventories by 37% or $90.6 million from $245.3 million to $154.7 million."

Mr. Cortina concluded, "This will allow us to reallocate capital into projects and areas that offer substantially higher returns such as the hemodialysis market in China that we are entering based on the experience and operating success we had in China over the last 20 years in the medical field.  Outpatient hemodialysis treatment offers very attractive growth potential as China has more diabetics than other country in the world."

Stakeholder Communication

Management welcomes any questions you may have and looks forward to discussing our operations, results and plans with stakeholders:

  • Stakeholders are encouraged to read our entire management's discussion and analysis for the six months ended June 30, 2016 as set forth in our management's discussion and analysis for the three and six months ended June 30, 2016 and our unaudited consolidated financial statements for the three and six months ended June 30, 2016 (the "Quarterly Report") for a greater understanding of our business and operations.
  • All stakeholders who have questions regarding the information in the Quarterly Report may call our North American toll free line: 1 (844) 331 3343 or International callers: +1 (604) 662 8873 to book a conference call with members of our senior management. Questions may also be emailed to Rene Randall at rrandall@bmgmt.com.

About MFC

We are a merchant bank with diversified finance and supply chain operations and other investments. We commit our own capital to promising enterprises and invest and otherwise capture investment opportunities for our own account. We seek to invest in businesses or assets whose intrinsic value is not properly reflected. Our investing activities are generally not passive. We actively seek investments where our financial expertise and management can add or unlock value.

Disclaimer for Forward-Looking Information

Certain statements in this news release are forward-looking statements or forward-looking information, within the meaning of applicable securities laws, which reflect our expectations regarding our future growth, results of operations, performance and business prospects and opportunities. Forward-looking statements consist of statements that are not purely historical, including statements regarding our business plans, anticipated future gains and recoveries, our plans to enter new businesses, our strategy to reduce trade receivables and inventories and increase profitability, the integration of our bank acquisition, the completion of proposed divestitures, future business prospects and any statements regarding beliefs, expectations or intentions regarding the future. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as "plans", "expects", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates", "believes", variations or comparable language of such words and phrases or statements that certain actions, events or results "may", "could", "would", "should", "might" or "will be taken", "occur" or "be achieved" or the negative connotation thereof.

While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. No assurance can be given that any of the events anticipated by the forward-looking statements will occur or, if they do occur, what benefits we will obtain from them. These forward-looking statements reflect our current views and are based on certain assumptions and speak only as of the date hereof. These assumptions, which include our current expectations, estimates and assumptions about our business and the markets we operate in, the proposed entry into new markets and businesses, the global economic environment, interest rates, commodities prices, exchange rates, our ability to integrate our newly acquired bank and our ability to satisfy all of the conditions to complete proposed divestitures, may prove to be incorrect. No forward-looking statement is a guarantee of future results. A number of risks and uncertainties could cause our actual results to differ materially from those expressed or implied by the forward-looking statements, including those described herein and in our Quarterly Report and 2015 annual report on Form 20-F. Such forward-looking statements should therefore be construed in light of such factors. Although we have attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. Investors are cautioned not to place undue reliance on these forward-looking statements. Other than in accordance with our legal or regulatory obligations, we are not under any obligation and we expressly disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Additional information about these and other assumptions, risks and uncertainties is set out in the "Risk Factors" section of our Quarterly Report and in our 2015 annual report on Form 20-F filed with the Securities and Exchange Commission and Canadian securities regulators.

 

To view the original version on PR Newswire, visit:http://www.prnewswire.com/news-releases/mfc-bancorp-ltd-reports-results-for-the-three-and-six-months-ended-june-30-2016-300313190.html

SOURCE MFC Bancorp Ltd.

Corporate: MFC Bancorp Ltd., Rene Randall, 1 (604) 683 8286 ex 2, rrandall@bmgmt.com; Investors: DresnerAllenCaron Inc., Joe Allen, 1 (212) 691 8087, jallen@dresnerallencaron.com

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