Admitting that "We do not believe that the second quarter and six-months results are indicative of the potential earning power of our business," MDC Chairman-CEO Miles Nadal broke the news to investors it would post a loss of $964,000 on revenue of $92 million for the second quarter ended June 30, compared to earnings of $932,000 on revenue of $58 million for the same period the prior year. That marks its fourth consecutive quarter of losses.
In addition, management revised downward expectations for the year, saying that revenue, originally expected to reach $468 million, is now expected to come in between $435 and $450 million.
"I was disappointed," said Jeff Tkachuk, analyst, BMO Nesbitt Burns, Toronto.
A particular sore point for one investor, Ross Taylor, was costs. "I'm exceptionally frustrated with your inability to give us a strategy and a plan to get your costs down," he told MDC executives on the call.
Operating costs in the second quarter rose 52% to $104.9 million versus the year ago period; in the first half, operating costs increased 40% to $198.7 million compared to first-six months of 2004. The rise was partially attributed to an increase in costs necessary to comply with Sarbannes-Oxley, as well as bringing legal counsel in-house.
Mr. Nadal responded that though management is "not pleased with the results to date," MDC's $15 million of free cash flow is a positive and the company" has an exceptionally good balance sheet." He added that MDC is committed to divesting non-core assets, noting that the current cost structure is "not indicative of what we think the future will be. There is huge leveragability in terms of what's possible and the cost structure doesn't need to grow."
"You use a lot of nice language," retorted Mr. Taylor, but "it's important to show that the model actually works."
MDC's "perpetual partnership" model differs from larger holding company competitors in that it buys stakes in various companies, rather than making outright acquisitions.