Velan Inc

TSX:VLN

Earnings Call Transcript 2020-Q2

[Operator]

Greetings, and welcome to the Velan's Second Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Friday, October 11, 2019. I would now like to turn the conference over to Mr. Yves Leduc, President and CEO. Please go ahead.

[Yves Jacques Leduc, President, CEO & Director]

Thank you, and welcome to our second quarter fiscal year 2020 conference call. I'm joined today by John Ball, as usual, our CFO. I will start with a brief summary of our results followed by a more detailed discussion of our transformation effort. We'll then open the line to your questions.This was one of the most profitable quarters since fiscal year 2017. I will explain in further detail how this was achieved but would like first to acknowledge the excellent performance of our overseas operations. I'm particularly pleased with the progress that our Italian subsidiary has been making in the upstream oil and gas market after a few challenging years. Let's talk about net earnings. We were able to return to profitability this quarter with net earnings of $1.4 million or $0.06 per share compared to a net loss of $2.4 million or $0.11 per share last year. This improvement was achieved through improved margins as well as lowered administration costs of $1.4 million partially offset by lower sales volume.Our gross profit percentage increased by 460 basis points from 21.1% to 25.7%. The increase in the gross profit percentage is mainly attributable to a stronger proportion of higher margin product sales and an increased sales volume in our Italian operations, which allowed our subsidiary to cover its fixed cost much more efficiently. We also noted an increase in the gross profit percentage of our North American operations in comparison to the first quarter of the current fiscal year, an increase that is primarily attributable to our MRO business.EBITDA amounted to $5.2 million or $0.24 per share compared to $1.4 million or $0.06 per share last quarter. The $3.8 million improvement in EBITDA is primarily attributable to a stronger gross profit percentage due to the shipment of higher margin orders combined with the reduction of administration costs, a greater focus on higher margin cohesion opportunities partially offset by an overall lower sales volume. Let's talk about sales, order bookings and backlog. Sales decreased by $5.9 million or 6.5% for the quarter. Sales were negatively impacted by decreased shipments of certain large project orders in our North American and French operations resulting from customer-related issues and the timing of the delivery schedule for such orders. The decrease was partially offset by an increase in shipments of large project orders in our Italian operations, thanks to the record backlog of shippable orders at the beginning of the year. The decrease of sales in our French operations is due to the timing of the deliveries of certain large project orders, which are scheduled in the latter part of the fiscal year. Bookings decreased by $12.8 million or 12.4% for the quarter. This decrease is primarily attributable to the lower order bookings by our Italian operations, which had record large project orders in the prior year. Our project quotation activity, this is important to note, has notably increased this year in sectors where margins are healthy and concurrently decreased in other sectors where we experienced the most aggressive competition and where margins are much tighter. This shift is a result of deliberate screening that is expected to take effect gradually as we replace our existing backlog with higher margin orders. The net decrease in bookings experienced in the last 6 months, which we aim to reverse, must be understood in this context. Our book-to-bill ratio for the current fiscal year was 0.91. As a result of billings outpacing bookings, we ended the period with a backlog of $425.6 million, a decrease of $24.1 million or 5.4% since the beginning of the current fiscal year. Besides the disappointing book-to-bill ratio, the backlog was also negatively impacted by the weakening of the euro spot rate against the U.S. dollar since the beginning of the fiscal year, dropping from $1.14 to $1.10. Overall financial position, comments on that. We continue to have a strong balance sheet. Net cash settled at $34.9 million, a decrease of $6.0 million or 14.7%. The net cash per share was USD 1.61 or CAD 2.15. Our equity at the end of quarter settled at $298.8 million or USD 13.82 per share. In Canadian dollars, our equity per share was CAD 18.37 at August 31, 2019, compared to our TSX share price at the close of August 30, 2019, business day of CAD 6.90, indicated -- indicating that our share price continues to be undervalued. Finally, the Board of the company has authorized on October 10, 2019, a normal-course issuer bid to purchase for cancellation up to 151,384 subordinate voting shares representing approximately 2.5% of the outstanding subordinate voting shares of the company. The normal-course issuer bid is subject to the approval of the Toronto Stock Exchange. So that was a summary of our results. Now I'd like to turn to our strategic deployment, and we're seeing many of our past investments and decisions bear fruits and generate benefits that will help catalyze our transformation agenda, and I have a few observations to underpin this statement. First, we are on schedule with the restructuring and specialization of our North American manufacturing footprint and increasing the capacity of our Indian plan -- plant to make it ready for the transfer of commodity valves still manufactured in North America.We have reached an agreement with 2 of the 3 unions about the terms of the renewed labor agreement in the context of our V20 agenda. This is a great development that will allow to move ahead in Granby and Williston, Vermont, with the changes announced earlier this year. With respect to the Montréal situation, we have made what we believe is a very reasonable offer to the local union executive team that has still not been accepted despite positive support from the CSN itself. We're hoping for a resolution soon.Furthermore, the new strategic business units have definitely sharpened our focus on discrete market and end-user opportunities, planting the seeds for better profitable growth. As was -- as I was indicating earlier, we're already able to attack market opportunities with greater intensity and greater discernment about their margin potential. Let's talk about as an example what's happening in the MRO and aftermarket business. I'm pleased with the success that we've experienced in the last couple of years after a notable downturn in fiscal year '17 and '18. As I reported in earlier calls, we have experienced record bookings for commodity valves last fiscal year, thanks in part to the expansion of our distributor network. This year, we have revved up our Korean capacity to full speed in order to execute the increased backlog and our Korean operations have stepped up to the plate superbly meeting the challenge of increasing their production capacity in very little time.Fifth observation, we're now observing tangible benefits from 2 years of pursued investments in modernizing our business processes, upgrading our ERP, focusing specifically on customer service and operations effectiveness. As a result, and as a notable example, we're seeing our delivery performance, an issue that I have identified in the past quite often, improved notably in the last few months, more importantly, customers are noticing. Let me give you a few statistics. Our average days of lateness have gone down by 20% this year versus a target of 25%. We're seeing project management deliver increasingly on time the project orders that we take. And since we have introduced a new tracking system and deployed the processes across the whole company to support it, we've taken over 621 line orders earlier this year and the percentage of those line orders that are green, in other words, are absolutely on track to be delivered on schedule, are over 80%. So far, since we introduced that process and tool, we've delivered 17 lines of orders and year-to-date on-time delivery is over 90% with average days of lateness close to 0. This is clearly a breakthrough in our investments in delivering improved performance in our delivery. And as I said earlier, our customers are noticing, planting the seeds for increased business, reduce costs and expenses, but more importantly, greater customer satisfaction. A perfect example of the new capabilities in managing complex projects is the recent delivery of a 34-inch high-pressure 60,000-pound valve. This is a milestone achievement. It was delivered to the engineering firm from Japan called Chiyoda. Let me have the pleasure of reading a recent e-mail received from the engineering firm. He says, as so reported separately, first -- and he is writing to his end-user customer. As so reported separately, the first 34-inch 9-chrome super high-pressure steam valve was successfully -- has successfully left Velan on September 24 and ETA China is on October 21. This is even ahead to the contractual delivery date of October 11 by 3 weeks, and we can meet our requirements by October 31. This great success was achieved by the highest focus from Velan management and by the best efforts from the Velan team in the photos. There's a picture that I'm sure you will see soon as we will have it published eventually. As this size and the design of valve is a big challenge even for Velan, top fabricator of high-pressure valves, they are very proud of the success. You can easily understand how happy they are from the photos. The end user replied, now that's a valve 34-inch Class 1500 F91 for super high-pressure steam service, another proud moment for team olefins. My congratulations to the team for their unwavering commitment and relentless pursuit. This was the result of cross-functional coordination across every department, including our workers in the plant to the folks who convinced the customer that it could be done. And I had very interesting statement made from our customer recently. He said, even the end user couldn't believe it. This also serves as a perfect example of what makes Velan unique in the valve market. One of the reasons we created new business units earlier this year was to capture market share through more effective differentiation of our product abilities. The success of the Chiyoda valve resulted directly from outstanding teamwork, as I just said, not to mention our investment in the project management excellence referred to internally as VPM, of which I gave you a few statistics a couple of minutes ago. Another observation I talked a couple of years ago about the imperative to invest in innovation to bolster our market efforts. There is no better way to escape market price traps, as I call them, than differentiation through product or technology. The Chiyoda valve is a great example, but adding to it are many other innovations that we are -- we've successfully brought to our customers recently and that we're about to. And I will not talk about those that we're about to other than to say that a few new product introductions are planned for the next year. But I will mention that we have introduced a new coating and severe service for the mining applications that we're after. We call it VEL-8. It's been in operation since the month of July in New Caledonia, and we are getting fantastic report. For those who are not aware of it, coating is what my General Manager of severe service calls the secret Kentucky Fried Chicken recipe that makes our valves unique, and it's been well received by the customer, and we'll continue to introduce such innovations that will help sell our products and deliver value to our customer. We introduced also a new PLC that's a program logic control design called the control panel that we usually sell with our coker ball valves. We sold it for a significant amount of money in Kuwait. It's been extremely well received and this was the redesign of an old system that we've had since the '80s, and we're quite proud with the accomplishment of a very small team of people. There's a lot of things going on. We're preparing our growth plans, supporting our project and severe service manufacturing business, so stay tuned as we expand our innovation pipeline in years to come. Another very important innovation, which we reported 3 years ago, was the ABV Italian -- ABV cable drive actuator, completely unique, that we've sold already to Italian customers or customers to our Italian sub. And for the first time, we've combined it with actual valves manufactured in North America. Also, in the valve industry, the actuator has a design that's perfectly suited for mining applications and that also has been well received. So this is a good example of how we bring our subs working together as a global company. Last but not least, I need once again to acknowledge the remarkable turnaround of our Italian sub from having had to shut down the factory for a few months in 2016 because of a shortage of orders to experiencing a record backlog this year producing at full capacity. What explains this? It's very simple. It's niche focus, incredible intensity and cross-functional coordination. And the result is probably one of the very few operations in the upstream, midstream oil and gas market who are successfully delivering good results and growing in the current period. All of this is indeed encouraging. However, the company, year-to-date, is still experiencing losses, despite a profitable second quarter. We're mindful of this, as we seek to accelerate the deployment of our plan. For now, I remind everyone that the most significant impact of the company's transformative V20 initiatives is only expected late next year when the task of reorganizing and reducing the company's North American footprint is planned to be completed. Until then, our focus remains on ensuring Q2 trends are maintained by improving our business performance through greater market and customer focus and pursued operational excellence. This concludes my comments. I'll open up to questions, which both John and I are ready to answer. Thank you.

[Operator]

[Operator Instructions] There seems to be no questions at this time.

[Yves Jacques Leduc, President, CEO & Director]

So I will thank everyone for your attention. For those living in Canada, I wish you a very happy, long Thanksgiving weekend, and I look forward to our next conversation. Thank you very much.

[Operator]

That does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your line. Have a great day, everyone.