Velan Inc

TSX:VLN

Earnings Call Transcript 2024-Q1

[Operator]

[Foreign Language] Greetings, and welcome to the Velan Inc. Q1 Financial Results Conference Call. [Operator Instructions]

[Foreign Language] As a reminder, this conference is being recorded Friday, July 7, 2023.

[Foreign Language] I would now like to turn the conference over now to Bruno Carbonaro, Chief Executive Officer and President. Please go ahead.

[Bruno Carbonaro, Chief Executive Officer and President]

Hi, everyone. Thank you for joining today our conference call.

Let's start by presenting the usual disclaimer that you will also find on the second page of the presentation that will be posted shortly on our website in the Investor Relationships -- Relations section. As always, the first section of the disclaimer mentioned that the presentation provides an analysis of our consolidated results for the quarter ended May 31, 2023. The Board approved these results yesterday July 6, 2023. The second paragraph refers to supplementary financial results, which are reconciled at the end of this presentation. Finally, the last paragraph refers to forward-looking information, which are subject to risks and uncertainties and can't be guaranteed. The forward-looking statements contained in this presentation are expressly qualified by this cautionary statement.

This being said, now let's proceed with the call. Welcome to our first quarter fiscal year 2024 conference call. I'm joined today by Rishi Sharma, our CFO. I will start with a brief summary of our results, following by a detailed presentation by Rishi, and then my closing comments. We won't be taking any questions at the end of the call today as last time.

So the key highlights of the quarter are as follows.

Sales for the quarter amounted to $67.7 million, a decrease of $7.3 million or 9.8% compared to the same quarter of the previous fiscal year. The decrease for the quarter is primarily attributable to accelerated shipments in the fourth quarter of the previous fiscal year due to increased customer demand and a capacity to also increase our production rapidly. It's also attributable to delays on certain shipments in the current quarter caused by customer readiness issues, and finally, a shortage of deliverable orders in our Italian operations.

Negative EBITDA of $3.8 million and net loss of $8.3 million for the quarter compared to a negative EBITDA of $2.9 million and a net loss of $7.4 million last year. The decrease in EBITDA is primarily attributable to decrease in gross profit, partially offset by a decrease in administration costs.

Our net cash amounted to a solid $58.6 million at the end of the quarter, an increase of $8.4 million since the beginning of the fiscal year, driven by continued improvements in operating cash flow generation.

I now hand over to Rishi, who will provide you more details on the performance of the quarter.

[Rishi Sharma, Chief Financial Officer]

Thank you, Bruno. Hello, everyone. [Foreign Language]

If we look at the backlog, the total backlog increased by $26.2 million or 5.6% since the beginning of the fiscal year, which amounted to $490.5 million at the end of the quarter. The increase in the backlog is primarily due to a strong book-to-bill ratio of 1.36 as a result of bookings outpacing sales in the current quarter. It's important to note that within the next 12 months, the backlog is -- sorry, the backlog [executable] (ph) within the next 12 months is relatively stable from the first quarter of the previous year.

Bookings amounted to $91.8 million for the quarter, a decrease of $1.6 million or 1.7% compared to the first quarter of last year. This decrease is partially attributable to lower marine orders recorded in our North American operations, but partially offset by an increased upstream and gas and nuclear orders recorded in our Italian and French operations, respectively.

If we look at our sales, sales were lower for the quarter, as mentioned by Bruno, decreasing by $7.3 million or 9.8% compared to the first quarter of last year. Again, the decrease in sales for the quarter is primarily attributable to the decreased shipments of large orders in our Italian and French operations. This decrease was caused as well by an acceleration of shipments in the fourth quarter of the prior fiscal year as a result of customer demand and our increased production ramp up, delays on certain shipments in the current quarter caused by customer readiness and commercial issues, and finally, a shortage of the deliverable backlog in our Italian operation. The decrease in sales for the quarter was partially offset by increased shipments in our North American operations that continue to ramp up despite also being faced with a variety of commercial customer issues and related delays in shipments.

Let's now move to our EBITDA. EBITDA for the quarter amounted to a negative $3.8 million or $0.18 per share compared to a negative $2.9 million or $0.13 per share last year. The unfavorable movement in EBITDA for the quarter is primarily attributable to lower gross profit, partially offset by the decrease in administrative costs. Our gross profit was impacted by the lower volumes and therefore absorption-related costs.

If we look at the gross profit, it decreased for the quarter, totaling $15.1 million or 22.2% compared to last year's $20.1 million or 26.8% for the last year. The decrease in gross profit percentage for the quarter, as mentioned, is primarily attributable to the lower sales volume, which did impact the absorption of our fixed production overhead costs. Our gross profit was also negatively impacted by the unfavorable, unrealized foreign exchange translations relating to the fluctuation of the U.S. dollar against the euro when compared to the similar movements of the previous year. Finally, a decrease in gross profit was also due to the unfavorable effect of the product mix delivered in the first quarter.

Administration costs for the quarter amounted to $21.5 million, a decrease of $4.3 million or 16.7%. The decrease in administrative costs for the quarter is primarily attributable to the recording of the last quarter of the previous year of an asbestos provision for potential settlement values of future unknown claims. The settlement expense in the first quarter of fiscal year '23 amounted to $3.2 million. The decrease in administrative costs for the quarter is also due to lower outbound freight costs, which have now stabilized, sales commissions in reaction to the lower quarterly sales volume, as well as an overall control on the S&A cost structure.

Let's now look at the cash position of the company. If we look at net cash, our cash increased by $8.4 million since the beginning of the fiscal year. The free cash flow generated for the same period was $9.6 million. The favorable movement in cash provided by operating activities for the quarter is primarily attributable to favorable movements in non-cash working capital items, partially offset by the decrease in EBITDA. The positive non-cash working capital items for the quarter consisted primarily the significant decrease and in collections of our accounts receivable, mainly explained by the high volume of revenues that we secured in Q4 of the last fiscal year and partially offset by negative non-cash working capital movements, which were primarily due to an increase in inventories in reaction to the overall increase in backlog and combined with the temporary shipment delays as explained previously.

I'll now pass it back to Bruno for his closing comments for Q1.

[Bruno Carbonaro, Chief Executive Officer and President]

Thanks, Rishi.

We're obviously disappointed by the temporary shipment delays [offset] (ph) in the first quarter of this fiscal year, but we remain confident for the remaining part of the year for a couple of reasons: A, our backlog has improved during the quarter, highlighted by similar bookings than last year; secondly, our cash base increased during the quarter, thanks to consistent focus on working capital management, continuing on the trend realized in Q4 of last year; thirdly, we are still working on a large opportunity base of potential bookings; and finally, I ensure you that despite a tougher quarter, execution remains our top priority, and we will address issues encountered this quarter to improve and meet our on-time delivery commitments.

Finally, we are also dedicating all the necessary resources and efforts to prepare a successful closing of the transaction with Flowserve.

That's now the end of the presentation. Thanks for your attention.

[Operator]

[Foreign Language] Thank you. That does conclude the conference call for today. We thank you for your participation. Please disconnect your lines, and have a great day everyone.