MRRM Inc. - Directors' Report and Management Discussion and Analysis of the Financial Condition and Results of Operations - Interim 2014.Q2 August 31, 2013 (2nd Quarter)

The following discussion and analysis should be read in conjunction with the FY 2014 second quarter statements filed with SEDAR.  Included in these documents may be forward-looking statements with respect to the Company.  These forward-looking statements by their nature necessarily involve risks and uncertainties that could cause actual results to differ materially from those contemplated by such statements.  The Company considers the assumptions on which these forward-looking statements are based to be reasonable at the time they were prepared but cautions the reader that these assumptions regarding future events, many of which are beyond the control of the Company, may ultimately prove to be incorrect.

The unaudited interim consolidated financial statements were prepared by the Company in accordance with IFRS and have not been reviewed by the Company's auditors. Certain comparative figures have been reclassified to conform with the presentation adopted in the  financial statements.

Additional documents and information are available at the System for Electronic Document Analysis and Retrieval (SEDAR)  and can be accessed through the internet: For MRRM's profile or for documents go to www.sedar.com Information is also available on the Corporate website at www.MRRM.ca.

MONTREAL, Oct. 3, 2013 /CNW Telbec/ -

Consolidated Income And Comprehensive Income and Equity

Revenues for the period (last year) were $29,181,000 ($29,504,000) decreasing by $323,000 (-1.1%). As shown in the segmented information, sales and income from operating activities amounted to $29,127,000 ($29,484,000) being 99.8% (99.9%) of total revenues. Income from corporate totaled $54,000 ($20,000). Unrealized losses in fair market value of the portfolio amounted to $40,000 compared to $87,000 last year. Operating Revenues decreased by $357,000 (-1.2%) compared to last year. Revenue from Corporate increased by $34,000; for details refer to Portfolio Income Summary under Corporate.

Costs and expenses for the period (last year) were $29,682,000 ($29,064,000), an increase of $618,000 (2.1%). Costs related to operating activities, before exchange and interest, increased by $647,000 (2.2%). Expenses related to corporate decreased by $25,000.

Operating results are discussed later on in this report.

The impact of the fluctuating Canadian dollar resulted in a total currency exchange loss of $75,000 compared to exchange gain of $70,000 last year, all included under cost of sales. As disclosed in the Notes, the net exposures were as follows: at August 31, 2013, US ($1,034,000); at August 31, 2012, US$3,664,000; at February 28, 2013, US ($312,000) and at February 29, 2012, US$2,565,000.

The Company uses foreign exchange contracts to manage foreign exchange exposure.  At August 31, 2013, the Company had foreign exchange contracts outstanding allowing the Company to buy USD $4,100,000 at an average rate of 1.0355. The maturity dates of these contracts range from September 2013 to February 2014. The Company has recorded a current term asset on the condensed consolidated statements of financial position under the caption "derivative financial assets" in the amount of $83,000.

The Company is exposed to foreign currency risks due to its import of bulk rice from the USA and overseas. These risks are partially offset by sales in U.S. funds and by the purchase of forward exchange contracts.
A 1% increase (decrease) in the U.S. exchange rate will increase (decrease) profit by approximately $175,000 annually. The sensitivity analysis is based on the Company's net foreign currency requirements and also takes into account forward exchange contracts that offset effects from changes in currency exchange rates.

Interest expensed on bank indebtedness amounted to $35,000 for the period compared to $45,000 last year for a decrease of $10,000.

Profit (loss) before income taxes for the period (last year) was -$501,000 ($440,000), a decrease of $941,000. Profit (loss) from operating activities for the period (last year) was -$469,000 ($532,000), a decrease of $1,001,000. Loss from corporate for the period (last year) was -$32,000 (-$92,000), an improvement of $60,000.

Income taxes for the period (last year) were -$161,000 ($93,000). Details of the income tax components are presented in the Notes to the financial statements.

Profit (loss) for the period (last year) was -$340,000 ($347,000) or -$0.13 ($0.14) per share.

The declaration and payment of dividends is at the discretion of the Board of Directors.

Summary of Quarterly Results

The following financial summary is derived from the Company's financial statements for each of the eight most recently completed fiscal quarters.


Summary of Quarterly Financial Results for the eight most recent fiscal quarters Aug 31,
2013
(2014.Q2)
May 31,
2013
(2014.Q1)
Feb 28,
2013
(2013.Q4)
Nov 30,
2012
(2013.Q3)
Aug 31,
2012
(2013.Q2)
May 31,
2012
(2013.Q1)
Feb 29,
2012
(2012.Q4)
Nov 30,
2011
(2012.Q3)
(Expressed in thousands, except for amounts per share - unaudited) $ $ $ $ $ $ $ $
Revenues 14,864 14,317 14,671 14,778 14,801 14,703 16,014 16,522
Profit (loss) -60 -280 367 86 271 76 510 407
Profit (loss) per share -0.02 -0.11 0.15 0.03 0.11 0.03 0.20 0.16
Dividends per share 0.00 0.00 0.00 0.80 0.00 0.00 0.00 0.50

Revenues for this quarter (last year) were $14,864,000 ($14,801,000), an increase of $63,000 (0.4%). Revenue from operating activities amounted to $14,847,000 ($14,694,000) being 99.9% (99.3%) of total revenues. Income from corporate totaled $17,000 ($107,000). Operating revenues for this quarter increased  by $153,000 (1.0%) compared to this quarter last year.  Revenue from Corporate decreased by $90,000.

Costs and expenses for this quarter (last year) were $14,959,000 ($14,472,000), an increase of $487,000 (3.4%). Costs related to operating activities, before exchange and interest, increased by $492,000 (3.4%).

Included in the financial results for this quarter (last year) are investment tax credits of $62,000 ($38,000).

Interest expense for this quarter (last year) was $20,000 ($14,000) and was $15,000 in 2014.Q1.

Profit (loss) before income taxes for this quarter (last year) was -$95,000 ($329,000), a decrease of $424,000. Profit (loss) from operating activities were -$74,000 ($275,000), a decrease of $349,000 and corporate were -$21,000 ($54,000), a decrease of $75,000.

Income taxes for this quarter (last year) were -$35,000 ($58,000). The effective tax rates are presented in the Notes to the financial statements.

Profit (loss) for this quarter (last year) was -$60,000 ($271,000) or -$0.02 ($0.11) per share.

Consolidated Cash Flows, Liquidity and Financial Position

In investing activities, the Company added $832,000 of net property, plant and equipment compared to $846,000 last year.

Available credit facilities

The credit facility available and reported at last year-end remains unchanged. The facility is comprised of a revolving line of credit for $7,000,000 CDN {or its US equivalent}. The Company may also take advantage of Bankers Acceptances. The financial covenants and arrangements relating to financing facility are detailed in the Notes to the audited consolidated financial statements. These covenants are being respected and have been met.

Trade receivables increased by $1,011,000 compared to last fiscal year-end. Account balances are substantially current, there are no anticipated serious collection issues and any potential write-offs have been provided for in the accounts.

Inventories increased by $1,072,000 (14.8%) and overall volumes of rice increased by (13.6%).

Marketable securities - see table of Investment Mix in discussion of results.

Property, plant and equipment increased by $33,000 comprised of additions of $832,000 and amortization of $799,000.

Bank indebtedness was $2,377,000 compared to $804,000 at last year-end.

Trade and other payables increased by $1,697,000 mainly due to amounts due related to the agency business and timing on rice purchases.

Deferred taxes, net liability, decreased by $109,000.

Total equity decreased by $283,000 to $17,348,000 from $17,631,000 and represents $6.84 ($6.96) per share.

Capital stock remained unchanged at $539,000 and represents 2,535,000 issued common shares.

The MRRM Inc. shares have a very limited distribution and are infrequently traded on the TSX-Venture Exchange under the symbol MRR. www.TSX-Venture Exchange

Cash Flows, Liquidity and Financial Position by operating segment

Food processing and selling
Trade receivables increased by $824,000 compared to last fiscal year-end. Account balances are substantially current, there are no anticipated serious collection issues and any potential bad debts have been provided for in the accounts.

Inventories increased by $1,072,000 (14.8%) and overall volumes of rice increased by (13.6%).

Property, plant and equipment increased by $33,000 comprised of additions of $832,000 and amortization of $799,000.

Bank indebtedness was $3,308,000 compared to $1,086,000 at last year-end.

Trade and other payables increased by $540,000 mainly due to timing on rice purchases.

Deferred taxes, net liability, decreased by $96,000.

Ship agency services
Trade receivables increased by $187,000 compared to last fiscal year-end. Account balances are substantially current, there are no anticipated serious collection issues and any potential bad debts have been provided for in the accounts.

Bank position was $3,586,000 compared to $3,672,000 at last year-end.

Trade and other payables increased by $1,166,000 due to amounts due related to the agency business.

Corporate
Bank indebtedness was $2,655,000 compared to $3,390,000 at last year-end.

Portfolio was $3,329,000 compared to $3,288,000 at last year-end.

Deferred taxes, net liability, decreased by $13,000.

Trade and other payables decreased by $9,000.

Critical Accounting Policies:

The Company's critical accounting policies are those that it believes are the most important in determining its financial condition and results. A summary of the Company's significant accounting policies, including the critical accounting policies, is set out in the notes to the consolidated financial statements in the annual report for the year ended February 28, 2013.  An extract of these policies as well as new accounting policies adopted during the period, is set out in the notes to the quarterly consolidated financial statements.

Future Accounting Changes:

At the date of authorization of the Company's consolidated financial statements, certain new standards, amendments, and interpretations to existing standards have been published but are not yet effective, and have not been adopted early by the Company.

Management anticipates that all of the relevant pronouncements will be adopted by the Company for the first period beginning after the effective date of the pronouncement.  Information on new standards, amendments and interpretations that are expected to be relevant to the Company's financial statements is provided below.  Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Company's financial statements.

IFRS 9 Financial Instruments

The IASB aims to replace IAS 39 Financial Instruments: Recognition and Measurement in its entirety. The replacement standard (IFRS 9) is being issued in phases.  To date, the chapters dealing with recognition, classification, measurement and de-recognition of financial assets and liabilities have been issued.  These chapters are effective for annual periods beginning on or after January 1, 2015. Further chapters dealing with impairment methodology and hedge accounting are still being developed.

Management has yet to assess the impact that this amendment is likely to have on the consolidated financial statements of the Company. However, they do not expect to implement the amendments until all chapters of IFRS 9 have been published and they comprehensively assess the impact of all changes.

Discussion of Results:

In Food processing and selling, net sales decreased by $247,000 (-0.9%) to $26,905,000 for the period and increased by $283,000 (2.1%) for the quarter compared to last year while  rice sales volumes decreased by -4.7% for the period and by -.2% for the quarter compared to last year. The net sales decrease compared to last year is a result of decreased sales to industrial customers.  Costs and expenses increased by $619,000 (2.3%) to $27,371,000 for the period compared to last year.  Costs and expenses increased by $512,000 (3.8%) to $13,845,000 for the quarter compared to last year. Profit before income taxes for the period decreased by $866,000 to -$466,000 compared to last year and by $229,000 for the quarter compared to last year.

The Company continues to pursue new value-added retail products some of which will be outsourced. This outsourcing will minimize capital investment while enhancing Dainty Foods' offerings in the retail marketplace for both branded and private label items. The Company installed packaging equipment during the first quarter of this fiscal year to reduce the dependence on outsourcing certain products.  New selling relationships continue to be developed and are intended to add strength to our retail sales efforts.  Dainty Foods International (DFI) continues to make inroads into the US retail market.

Rice harvest in the USA at September 15th is well behind last year with 35% of planted acres harvested versus 61% one year ago. Arkansas has harvested 28% of planted acreage versus 70% one year ago.

However quality ratings are above the previous four years which bodes well for field and milling yields. Field yields are projected to be a record 7,511 pounds per acre, less than 1% higher than last year. Milling yields based on early harvests are expected to be 5% better than last year and 4% better than the average of the last three years.

The total USA rice crop is projected to be 185.1 million cwt, 7% less than last year. A 12% reduction in long grain production is offset by a 6% increase in medium grain production. This is the second smallest long grain crop since the 1997/98 crop year.

Total planted acreage is 2.49 million acres, 8% less than last year and the smallest planted acreage since 1987/88. Arkansas, the largest rice growing state, bore the brunt of grower conversions to more profitable corn and soybeans, with a planted acreage decline of 17% versus last year, the lowest since the 1987/88 crop year.

Meanwhile the two year rice cost differential between the Western Hemisphere and Asia continues. The cost of long grain milled rice in Vietnam and Pakistan is 55% of that in the USA and South America, while the cost of Thai long grain milled rice has dropped to 67% of that in the Western Hemisphere as the government's grower price support plan crumbles in the face of high inventories.

The USA is likely to lose market share in the Middle East and Sub-Saharan Africa to the lower priced Asian suppliers in 2013/14. Total USA exports are forecasted to be down 8.5% versus last year.

Approximately 40% of Dainty's rice puchases are for long grain rice.  The sum of the market factors place upward pressure on this rice segment.  We expect long grain prices to stay firm throughout the 2013/14 crop year.  Given good milling yields in the industry the cost of broken rices for flour is expected to rise.

Dainty Foods will continue to monitor the rice market daily and make purchase commitments as appropriate. The CDN dollar has weakened during the first half of the year and has negatively impacted margins.  Market predictions indicate that this trend will continue through the fiscal year.

In Ship agency services, revenue decreased by $110,000 (-4.7%) to $2,222,000 for the period and by $130,000 for the quarter compared to last year.

Profit before income taxes for the period decreased by $135,000 to -$3,000 and by $120,000 compared to this quarter last year.

The first half of the year was below expectations due to reduced wheat exports from Vancouver versus last year and reduced exports from the Great Lakes.  The industry in general is under pressure due to excess capacity as a result of decreased cargo volume. We do not expect any improvement through the balance of the year compared to last year.

Corporate,  portfolio income is summarized as follows:

  For the period For the quarter
  2014 2013 2014 2013
Dividend and interest income $39,000 $75,000 $19,000 $41,000
Capital gains $55,000 $32,000 $44,000 $29,000
Unrealized change in Fair Value -$40,000 -$87,000 -$46,000 $37,000
Totals: $54,000 $20,000 $17,000 $107,000

During this quarter, global financial markets declined, the loss in Fair Market Value is $40,000 for the period compared to $87,000 last year. The portfolio remains conservatively invested and no significant policy changes are foreseen.

Investment
Mix
Aug 31,
2013
(2014.Q2)
May 31,
2013
(2014.Q1)
Feb 28,
2013
(2013.Q4)
Nov 30,
2012
(2013.Q3)
Aug 31,
2012
(2013.Q2)
Cash & Equivalents 4.2% 2.8% 1.0% 0.2% 2.2%
Fixed income & Preferred Shares 31.7% 33.3% 35.3% 37.4% 44.9%
Equities 64.1% 63.9% 63.7% 62.4% 52.9%

Certification

The Company's management, under the direction and supervision of the Chief Executive Officer and Chief Financial Officer, continually evaluates the effectiveness of the Company's disclosure controls and procedures and has concluded that such disclosure controls and procedures are effective.

The Company's management is also responsible for establishing and maintaining internal controls over financial reporting.  These controls are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.

There have been no changes in the Company's internal controls over financial reporting during this quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Outlook

Dainty Foods expects to continue to increase retail volumes of value-added products to existing and new customers in Canada and the USA.

The consolidation of the Canadian retail market and competition for finite retail shelf space continues to challenge profitability in the food processing segment.

Increased rice cost as well as the weakening CDN dollar have negatively impacted margins. Market forecasts indicate that these trends will continue through the fiscal year.

In the Shipping Agency services, our joint operating agreement with Norton Lilly and Montship continues to be beneficial, however, weaknesses in the U.S. Exports and European and Mediterranean economies will  negatively impact profit compared to last year.

While the Company is anticipating growth in food processing and selling and maintaining a strong position within the ship agency services business, growth will be impacted by several factors including (i) the ability of the Company to secure rice at competitive prices (ii) acceptance of new products (iii) the ability within the marketplace to manage price increases to cover increased costs (iv) the yield and quality of rice supply (v)  foreign exchange fluctuations and (vi) general economic conditions.

Risks and Uncertainties
Overview

Management of risk includes properly identifying, communicating and controlling the risks which may cause a serious impact to the business. Management is confident that the Company employs effective procedures to address all material risks.

Detroit River International Crossing Construction Impact:

Significant construction activities are expected to continue on the property sites adjacent to the Dainty Foods facility in Windsor, Ontario. Dainty Foods has completed infrastructure changes to the facility to protect our food products from the possibility of airborne contamination. These changes primarily include fine particle filtration units. The Canadian federal government reimbursed 1.6 million dollars of the 2.9 million dollar investment.

The company has initiated discussions with the Ontario Ministry of Transport to recover the balance of the capital costs, however the outcome of these discussions is uncertain at this time.

Other

The following items were discussed in the MD&A in the last Annual Report and remain principally unchanged.  Please refer to these documents for  this information.

Ability to Sustain Revenue
Ability to Address Cost and Expense Concerns
Economic Conditions
Environment

For further information regarding financial risk management, please refer to the Notes to the interim financial statements.

On behalf of the Board    

(Signed)

Nikola M. Reford      
Chairman

(Signed)

Terry Henderson
President & Chief Executive Officer

Dated at Montreal (Westmount), QuebecOctober 3, 2013.

SOURCE: MRRM Inc.

For further information:

Lou Younan, Vice-President Finance & CFO, MRRM Inc., (514) 908-7777, Fax: (514) 906-0220, mr@mrrm.ca

Profil de l'entreprise

MRRM Inc.

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