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MRRM Inc. - Directors' Report and Management Discussion and Analysis of the Financial Condition and Results of Operations - Interim 2014.Q4 February 28, 2014 (4th Quarter)

May 1, 2014

The following discussion and analysis should be read in conjunction with the FY 2014 fourth 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, May 1, 2014 /CNW Telbec/ -



Consolidated  Income And Comprehensive Income and Equity

Revenues for the year (last year) were $61,617,000 ($58,953,000) increasing by $2,664,000 (4.5%). As shown in the segmented information, sales and income from operating activities amounted to $61,177,000 ($58,588,000) being 99.3% (99.4%) of total revenues. Income from corporate totaled $440,000 ($365,000). Unrealized gains in fair market value of the portfolio amounted to $252,000 compared to unrealized losses of $153,000 last year. Operating Revenues increased by $2,589,000 (4.4%) compared to last year. Revenue from Corporate increased by $75,000; for details refer to Portfolio Income Summary under Corporate.

Costs and expenses for the year (last year) were $62,077,000 ($57,981,000), an increase of $4,096,000       (7.1%). Costs related to operating activities, before exchange and interest, increased by $4,140,000 (7.2%). Expenses related to corporate decreased by $40,000.

Operating results are discussed later on in this report.

The impact of the fluctuating Canadian dollar resulted in a total currency exchange loss of $27,000 compared to a loss of $30,000 last year, all included under cost of sales. As disclosed in the Notes, the net exposures were as follows: at February 28, 2014, US$507,000 net assets and at February 28, 2013, US($312,000) net liabilities.

The Company uses foreign exchange contracts to manage foreign exchange exposure.  At February 28, 2014, the Company had foreign exchange contracts outstanding allowing the Company to buy USD $11,000,000 at an average rate of 1.0935. The maturity dates of these contracts range from March 2014 to January 2015. 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 $203,000.

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 in the upcoming fiscal year will affect profit by approximately $50,000 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 $87,000 for the year compared to $79,000 last year for an increase of $8,000.

Profit -loss before income taxes for the year (last year) was -$460,000 ($972,000), a decrease of $1,432,000. Profit -loss from operating activities for the year (last year) was -$723,000 ($824,000), a decrease of $1,547,000. Profit from corporate for the year (last year) was $263,000 ($148,000), an increase of $115,000.

Income taxes for the year (last year) were -$271,000 ($172,000). Details of the income tax components are presented in the Notes to the financial statements.

Profit -loss for the year (last year) was -$189,000 ($800,000) or -$0.07 ($0.32) per share.

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



ANNUAL RESULTS

(Expressed in thousands, except for amounts per share - unaudited)
2014

IFRS

$
2013

IFRS

$
2012

IFRS

$
2011

IFRS

$
Revenues61,617 58,953 59,456 63,803
Profit -loss-189 800 620 1,777
Profit -loss per share-0.07 0.32 0.24 0.70
Total Assets 36,338 33,028 36,946 38,052
Total non-current Financial Liabilities 0 0 0 290
Dividends Per share0.00 0.80 0.50 0.15





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 quartersFeb 28,

2014

(2014.Q4)
Nov 30,

2013

(2014.Q3)
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)
(Expressed in thousands, except for amounts per share - unaudited)$$$$$$$$
Revenues 15,955 16,481 14,864 14,317 14,671 14,778 14,801 14,703
Profit -loss -42 193 -60 -280 367 86 271 76
Profit -loss per share -0.01 0.07 -0.02 -0.11 0.15 0.03 0.11 0.03
Dividends per share 0.00 0.00 0.00 0.00 0.00 0.80 0.00 0.00





Revenues for this quarter (last year) were $15,955,000 ($14,671,000), an increase of $1,284,000 (8.8%). Revenue from operating activities amounted to $15,776,000 ($14,424,000) being 98.9% (98.3%) of total revenues. Income from corporate totaled $179,000 ($247,000). Operating revenuesfor this quarter increased  by $1,352,000 (9.4%) compared to this quarter last year.  Revenue from Corporate decreased by $68,000.

Costs and expenses for this quarter (last year) were $16,128,000 ($14,240,000), an increase of $1,888,000 (13.3%). Costs related to operating activities, before exchange and interest, increased by $1,936,000 (13.7%).

Interest expense for this quarter (last year) was $28,000 ($18,000) and was $24,000 in 2014Q3, $20,000 in 2014Q2 and $15,000 in 2014.Q1.

Profit -loss before income taxes for this quarter (last year) was -$173,000 ($431,000), a decrease of $604,000. Profit -loss from operating activities were -$326,000 ($246,000), a decrease of $572,000 and corporate was $153,000 ($185,000), a decrease of $32,000.

Income taxes for this quarter (last year) were -$131,000 ($64,000). The effective tax rates are presented in the Notes to the financial statements.

Profit -loss for this quarter (last year) was -$42,000 ($367,000) or -$0.01 ($0.15) per share.

Consolidated Cash Flows, Liquidity and Financial Position

In investing activities, the Company added $1,365,000 of net property, plant and equipment compared to $2,102,000 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 $1,426,000 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 $1,383,000 (19.2%) and overall volumes of rice increased by 8.7%.

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

Property, plant and equipment decreased by $294,000 comprised of additions of $1,365,000 and amortization of $1,659,000.

Bank indebtedness was$3,551,000 compared to $804,000 at last year-end.

Trade and other payables increased by $1,286,000 mainly due to amounts related to the agency business and timing on rice purchases.

Deferred taxes, net liability, decreased by $445,000.

Total equity increased by $28,000 to $17,659,000 from $17,631,000 and represents $6.97 ($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 $1,136,000 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 $1,383,000 (19.2%) and overall volumes of rice increased by 8.7%.

Property, plant and equipment decreased by $294,000 comprised of additions of $1,365,000 and amortization of $1,659,000.

Bank indebtedness was$3,886,000 compared to $1,086,000 at last year-end.

Trade and other payables increased by $647,000 mainly due to timing on rice purchases.

Deferred taxes, net liability, decreased by $455,000.

Ship agency services

Trade receivables increased by $290,000 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$3,119,000 compared to $3,672,000 at last year-end.

Trade and other payables increased by $620,000 due to the timing of payment of disbursements on behalf of ship owners.

Corporate

Bank indebtedness was$2,784,000 compared to $3,390,000 at last year-end.

Portfolio was$3,656,000 compared to $3,288,000 at last year-end.

Deferred taxes, net liability, increased by $10,000.

Trade and other payables increased by $19,000.

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, 2014.  An extract of these policies as well as new accounting policies adopted during the year, is set out in the notes to the quarterly consolidated financial statements.

Accounting Standards

Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by the Company

At the date of authorization of these 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 in the Company's accounting policies 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 consolidated financial statements.

IFRS 9 Financial Instruments

In November 2009, the IASB published the new standard IFRS 9 which will replace IAS 39 Financial Instruments: Recognition and Measurement. The standard provides guidance on the classification and measurement of financial instruments. In October 2010, the IASB amended IFRS 9 to add guidance on the classification and measurement of financial liabilities and requirements about the derecognition of financial assets and financial liabilities. In November 2013, the IASB published the section dealing with hedge accounting.

In November 2011, the IASB decided to consider making limited amendments to the financial asset classification model of IFRS 9 to address application issues. Additionally, in November 2013, the IASB decided to postpone application of IFRS 9 to an undetermined date. The Company's management has not yet determined the impact this new standard will have on its combined financial statements. Management does not plan on adopting IFRS 9 before the standard has been finalized and it can determine all of the impacts of these changes.

NEW ACCOUNTING STANDARDS:

A number of new and revised standards are effective for annual periods beginning on or after March 1, 2013. Information on these new standards is presented below.

IFRS 10 Consolidated Financial Statements

IFRS 10 supersedes IAS 27 'Consolidated and Separate Financial Statements' (IAS 27) and SIC 12 'Consolidation-Special Purpose Entities'. IFRS 10 revises the definition of control and provides extensive new guidance on its application. These new requirements have the potential to affect which of the Company's investees are considered to be subsidiaries and therefore to change the scope of consolidation. The requirements on consolidation procedures, accounting for changes in non-controlling interests and accounting for loss of control of a subsidiary are unchanged.

Management has reviewed its control assessments in accordance with IFRS 10 and has concluded that there is no effect on the classification (as subsidiaries or otherwise) of any of the Company's investees held during the period or comparative periods covered by these consolidated financial statements.

IFRS 12 Disclosure of Interests of Other Entities

IFRS 12 integrates and makes consistent the disclosure requirements for various types of investments, including unconsolidated structured entities. It introduces new disclosure requirements about the risks to which an entity is exposed from its involvement with structured entities. IFRS 12 did not have an impact on the Company's consolidated financial statements.

IFRS 13 Fair Value Measurement

IFRS 13 clarifies the definition of fair value and provides related guidance and enhanced disclosures about fair value measurements. It does not affect which items are required to be fair-valued. The scope of IFRS 13 is broad and it applies for both financial and non-financial items for which other IFRSs require or permit fair value measurements or disclosures about fair value measurements except in certain circumstances.

IFRS 13 applies prospectively for annual periods beginning on or after 1 January 2013. Its disclosure requirements need not be applied to comparative information in the first year of application. The Company has however included as comparative information the IFRS 13 disclosures that were required previously by IFRS 7 'Financial Instruments: Disclosures'. The Company has applied IFRS 13 for the first time in the current year.

IAS 1 Presentation of Financial Statements

In June 2011, the IASB published amendments to IAS 1, Presentation of Financial Statements which are effective for annual periods beginning on or after July 1, 2012 and are to be applied retrospectively. The amendments require that a company present separately the items of Other Comprehensive Income that may be reclassified to profit or loss in the future from those that would never be reclassified to profit or loss. The changes as a result of the adoption of the amendments to IAS 1 have been reflected in the Company's consolidated statement of Comprehensive Income.

Amendments to IAS 19 Employee Benefits

In June 2011, the IASB published an amended version of IAS 19, Employee Benefits. Adoption of the amendment is required for annual periods beginning on or after January 1, 2013. The amendment is generally applied retrospectively with certain exceptions. The amendment will require actuarial gains and losses to be recognized immediately in other comprehensive income, past service costs to be fully recognized immediately in profit or loss and the recognition of expected return on plan assets in profit or loss to be calculated based on the rate used to discount the defined benefit obligation.

The amendment to IAS 19 did not have a material impact on the comparative periods and, thus, the Company did not restate its reported results throughout the comparative periods.

Discussion of Results:

In Food processing and selling, net sales increased by $2,768,000 (5.2%) to $56,431,000 for the year and by $1,424,000 (10.8%) for the quarter compared to last year.  The net sales increase compared to last year is a result of increased sales to industrial customers.  Costs and expenses increased by $4,040,000 (7.6%) to $57,340,000 for the year compared to last year.  Costs and expenses increased by $1,881,000 (14.4%) to $14,918,000 for the quarter compared to last year.  Profit before income taxes for the year decreased by $1,272,000 to -$909,000 compared to last year and by $458,000 for the quarter compared to last year.

The Company continues to pursue new value-added retail products.  The Company installed packaging equipment during the first quarter of this fiscal year to reduce the dependence on outsourcing certain products.   Dainty Foods International (DFI) continues to make inroads into the US retail market.

The CDN dollar weakened during this fiscal year and negatively impacted margins. Market predictions indicate that this trend will continue.

Rice Market

The rice price gap between the United States / South America and Asian countries continued into its third year during our last fiscal. American and South American prices are 40% to 50% higher than Thai, Vietnamese and Pakistani prices and 30% to 40% higher than Indian prices for long grain milled rice.

The Thai government removed the grower price support scheme launched during October of 2011 and are selling the large stocks of rice accumulated during the plan into the world market.

Notwithstanding American exports have shown some improvement during the last year. The wide price differential allows Asian exporters to become more competitive in the attraction of North American customers. The quantity of shelf-ready packaged  rices entering North America is on the increase.

The 2013 / 2014 southern United States rice acreage was the smallest in 27 years and 11% less than the previous year. The low world prices have had a moderating effect on the upward movement of the American prices. The price of long grain rice has remained  flat to last year.

Industry long grain milling yields, the best experienced during the last four years, are attributed to a longer, cooler growing season. The production of broken rice by-products is reduced by one-third as a result of the improved milling yields resulting in both price and supply issues in the market. The by-products have many uses including the milling to rice flour.

January 17, 2014 California declared a State of Emergency regarding its low water supply situation. Water rationing for agricultural crops will be defined later in the spring.

The announcement had an immediate upward impact on the cost of Californian grown rices. USDA estimates that 20% fewer rice acres will be planted in California, while industry participants predict far higher declines.

The Californian decline in acreage has a spin-off effect in the southern United States. Long grain planted acres are expected to increase to the highest level since 2010 which should have a downward impact on new crop pricing. However the inventory carry-in stocks are estimated to be low. It remains to be seen how much of the available acreage in the southern United States will be dedicated to medium grain rice to take advantage  of  the lost medium grain acres in California.

Dainty continues to monitor the rice market daily and makes conservative decisions regarding purchases at the appropriate times to minimize risk to the business.

In Ship agency services, revenue decreased by $179,000 (-3.6%) to $4,746,000 for the year and by $72,000 for the quarter compared to last year.

Profit before income taxes for the year decreased by $275,000 to $186,000 and by $115,000 compared to this quarter last year.

This fiscal year's results were below expectations due to reduced cargo shipments in many areas.

The west coast continues to remain strong due to an increase in trade with the far east, however the east coast and Great Lakes are expected to continue with low volumes through 2014.

The Great Lakes are off to a slow start due to heavy ice cover. A surge in grain exports in the second quarter is expected due to a record harvest last year.

Corporate,  portfolio income is summarized as follows:

  

  For the yearFor the quarter
  2014201320142013
Dividend and interest income $91,000$159,000$27,000$45,000
Capital gains $48,000$359,000$0$0
Unrealized change in Fair Value $252,000 -$153,000$103,000$202,000
Increase in cash surrender value of life insurance policies, net of premiums $49,000$0$49,000$0
Totals: $440,000$365,000$179,000$247,000





During this quarter, global financial markets improved, the gain in Fair Market Value is $252,000 for the year compared to a loss of $153,000 last year. The portfolio remains conservatively invested and no significant policy changes are foreseen.



Investment MixFeb 28,

2014

(2014.Q4)
Nov 30,

2013

(2014.Q3)
Aug 31,

2013

(2014.Q2)
May 31,

2013

(2014.Q1)
Feb 28,

2013

(2013.Q4)
Cash & Equivalents 3.2% 2.7% 4.2% 2.8% 1.0%
Fixed income & Preferred Shares 28.7% 30.2% 31.7% 33.3% 35.3%
Equities 68.1% 67.1% 64.1% 63.9% 63.7%





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 negatively impacted margins during fiscal 2014. Market forecasts indicate that the CDN dollar will continue to trade below par.

A major industrial milled rice customer announced December 2013 the closure of their Ontario facility by the end of 2014.  The company plans to offset the lost contribution of $1,000,000 with cost reduction measures.

In the Shipping Agency services, our joint operating agreement with Norton Lilly and Montship continues to be beneficial.

While the Company is striving to improve margins 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.

In this context, the Company's board of directors has set up a Strategic Review Committee. The principal duty of the committee is to oversee a strategic review of the Company's business conducted by outside advisers.

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 Government 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

Nikola M. Reford

Chairman


Terry Henderson

President & Chief Executive Officer
     
Dated at Montreal (Westmount), QuebecMay 1, 2014.


SOURCE MRRM Inc.


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