30th Jun 2016 10:11
LONDON (Alliance News) - RM2 International SA Thursday said it faced "material challenges" in 2015 due to issues at its manufacturing plant in Canada, prompting it to begin moving operations to China after the year ended, as it aims to begin initial production from its new base early in 2017.
The pallet producer also proposed issuing USD20.0 million worth of shares to Woodford Investment Management LLP so it can secure adequate liquidity to last over the next 12 months to facilitate the move.
"Although 2015 and the early part of 2016 was a period of transition with a change to both the manufacturing process and in moving the principal manufacturing location to China, the board is confident that RM2 now has the right product and manufacturing structure to make significant progress," said the company.
The USD58.8 million pretax loss in 2015 was wider than the USD47.3 million loss booked in 2014 and operations remained unprofitable in the year. Revenue rose to USD8.0 million from USD2.0 million, but RM2 still posted a gross loss of USD36.5 million in 2015 compared to the USD19.6 million loss the year before.
Administrative expenses rose to USD21.4 million from USD18.3 million, but that was partly offset by not having to book any costs related to the initial public offering that was launched in 2014, a fall in other operating expenses and by a small rise in other operating income.
Ultimately, the operating loss widened to USD57.2 million from USD42.4 million. Finance activities partly cushioned that wider loss as income rose and costs fell.
"RM2 faced serious challenges in 2015 related to the production metrics at the Canadian facility. These challenges impacted both production volumes and cost per unit, constraining our ability to develop further penetration with our target customers. The manufacturing partnership agreed with Zhenshi Holding Group Co Ltd announced in April, will, we believe, solve both of these issues," said Chief Executive John Walsh.
"Pallets from China are expected to be available for deployment in North America in the first quarter of 2017. We remain committed over the long term to North American production. We have good cause to be highly confident of profitable deployment of pallets delivered from China, all of which are earmarked for customers in North America in 2017," he added.
Manufacturing inefficiencies "heavily impacted" the company in the year as the Canadian facility was producing lower amounts of pallets at a higher than expected cost and RM2 said this alone contributed USD35.0 million of the total operating loss of over USD57.0 million.
The problems hampered EM2's aim of producing 1.5 million pallets per year as the Canadian facility was producing lower volumes at higher costs.
Putting that into perspective, RM2 produced 292,000 pallets in total during 2015, but that is still considerably higher than the 30,000 produced over the whole of 2014. Production was also impacted by the suspension of production over the summer due to the major design change from powder coating to gel coating.
In January, after the year ended, RM2 refocused its strategy to achieve better production metrics and protect the cash balance. Nearly half of the employees in Canada were laid-off end of January 2016 and a second lay-off was implemented in March 2016 taking down the headcount in the plant to 64.
Production was reduced to 30,000 pallets per month in the first quarter of 2016, compared to 45,000 pallets per month in November and December 2015.
In late 2015, RM2 was approached by one of its major fibreglass suppliers, China Jushi Co, with the view of strengthening commercial ties through a manufacturing collaboration in China. Management then signed a contract manufacturing agreement with Zhenshi in April, which it hopes will alleviate the problems suffered last year.
"This collaboration is expected to allow the group to increase the capacity utilization of its industrial assets while producing a pallet at substantially lower fixed production cost, assuming Zhenshi is able to execute the plan in terms of volumes and quality. The agreement with Zhenshi envisions the transfer and re-commissioning of a substantial proportion of the manufacturing equipment from the group's manufacturing site in Canada to China, which costs are supported by RM2," it said.
"Should the de-commissioning, the shipment and the re-commissioning of its equipment in China take longer than anticipated or should the other costs significantly be underestimated by management, the production of BLOCKpal pallets for lease and sale may be delayed and the going concern of the group be impacted," the company added.
The company ended the year "virtually debt free" and had cash of USD34.5 million.
RM2 also proposed a placing on Thursday, which shareholders will have to approve at the annual general meeting on July 18.
RM2 is seeking approval to issue USD30.0 million worth of convertible preference shares, which would be categorised as a new class of securities. Those shares would be priced at 0.35 pence each - suggesting up to 85.7 million shares could be issued.
Importantly, Woodford Investment Management has already said it would subscribe for USD20.0 million worth of those shares, which would total around 57.1 million shares, and that would keep the company funded for at least 12 months.
The remaining 28.6 million shares that could be issued, if approved by shareholders, to raise the other USD10.0 million could be issued "in due course", but said there is no certainty that this will happen.
Ultimately, the proceeds from Woodford would be used to fund the move of the manufacturing operations to China from Canada.
RM2 shares were down 3.2% to 22.50 pence per share on Thursday.
By Joshua Warner; [email protected]; @JoshAlliance
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