Velan Inc

TSX:VLN

Earnings Call Transcript 2021-Q2

[Operator]

Greetings, and welcome to the Velan Q2 Financial Results Conference Call. [Foreign Language] [Operator Instructions] [Foreign Language] As a reminder, this conference is being recorded. [Foreign Language] Friday, October 9, 2020. I would now like to turn the conference over to [Foreign Language] Yves Leduc, CEO. Please go ahead, [Foreign Language].

[Yves Jacques Leduc, CEO & Director]

[Foreign Language] Thank you, and welcome to our Q2 quarterly report call. Welcome to our conference call. I'm joined today by Rejean Ostiguy, our CFO; and John Ball, our Executive Vice President, Global Finance. There's a lot to talk about this morning, including the important changes in our Board of Directors, significant progress in our V20 implementation as well as our press release this morning reporting a very good example of our success in driving bookings up this year despite the headwinds of a global recession. To highlight the significance of yesterday's Board announcement, I will end this morning's report with comments on the change in our Board of Directors, but let's begin with our results. Net loss amounted to $5.1 million or $0.24 per share compared to a net earnings of $1.4 million or $0.06 per share last year. The increase in net loss for the quarter is primarily attributable to a lower gross profit; a $1.7 million unfavorable movement in unrealized foreign exchange losses, primarily attributable to the weakening of the U.S. dollar against the euro and the Canadian dollar over the course of the quarter; an increase in other expenses mainly due to land cleanup costs on the former factory; as well as an increase in restructuring and transformation costs, all of which partially offset by the recording of $4.3 million of wage subsidies for the quarter, which were allocated between cost of sales, administration expenses and restructuring and transformation costs. The subsidies were put in place by government authorities to prevent further job losses in the context of COVID-19 pandemic by offering wage relief to companies. This allowed us to maintain our employment levels required to being able to bounce back as soon as the recessionary effects of the pandemic disappear. Our gross profit percentage for the quarter decreased from 25.7% to 25.0%, a drop of only 0.7 points, which, in the context of sales being 20% lower than last year's second quarter, reflects the improvement in our margins. The decrease in gross profit percentage for the quarter was partially offset by the recording of a $2.3 million of wage subsidies. And on a year-to-date basis, the gross margin has actually notably increased versus the first 6 months of fiscal '20. I'll be explaining later in my address why our margins are improving, notwithstanding the wage subsidies, particularly in our North America project manufacturing business. With respect to bookings, backlog and sales, bookings increased by $24.6 million or 32.1% compared to the first quarter of the current fiscal year and by $10.6 million or 11.7% compared to the second quarter of the previous fiscal year. This increase is primarily attributable to higher orders recorded by our French and North American operations, particularly in the nuclear and downstream oil and gas markets. Our book-to-bill ratio for the quarter and half year was 1.43 and 1.23 as a result of bookings outpacing billings. We ended the period with a backlog of $462.7 million, an increase of $55.9 million or 13.7% since the beginning of the current fiscal year. Beside the strong book-to-bill ratio, the backlog was also positively impacted by the strengthening of the euro spot rate against the U.S. dollar since the beginning of the fiscal year, increasing from $110 million to $119 million. The backlog also increased for the period due to delays in shipments attributable to inefficiencies experienced in reconfiguring our Canadian plants under the V20 program as well as supply chain issues created by the COVID-19 pandemic. We have to manage many disruptions related to our supply chain, which caused significant delays on certain customer orders and due to travel restrictions. We experienced difficulties in getting inspection clearance to deliver certain large project orders. Sales amounted to $68.3 million, a decrease of $17.2 million or 20.1% from the prior year. Other than the issues related to supply chain and production disruption mentioned earlier, the decrease in sales for the quarter was also caused by the reduction of nonproject orders delivered by North American operations due to the unfavorable market conditions triggered by the pandemic, which significantly affected our distribution channel. More on that later. Our financial position now over the course of the quarter, we were able to secure new financing in our North American operations in the form of $17.3 million secured mortgage loan and a $65 million revolving credit facility, and in our Italian operations in the form of $3.4 million of unsecured state bank loans. The new financing will be used to support our operations, which is particularly useful in these challenging times; complete our V20 plan; and provide the necessary capital to pursue future growth initiatives while strengthening our balance sheet as the world economy faces a period of uncertainty. Net cash settled at $60.4 million at the end of the quarter, an increase of $29.4 million or 94.8% since the beginning of the fiscal year. The increase for the year is primarily attributable to strong favorable noncash working capital movements and $14.3 million of long-term debt additions, which were provided by the new financing. The net cash per share was USD 2.80 or CAD 3.65. Our equity at the end of the quarter settled at USD 288.5 million or $13.37 per share. In Canadian dollars our equity per share was CAD 17.43 as at August 31, 2020, compared to a TSX share price at the close of business on that day of $5.57, indicating that our share price continues to be undervalued and that, may I say, is an understatement. Let me now turn to the story behind the numbers, starting with, of course, COVID-19. The pandemic has forced the business world to quickly adapt to a completely new, I would say, hostile environment. As a reminder, here is how Velan has reacted. First, I want to remind everybody that our footprint almost matches perfectly the itinerary of the early virus outbreak with plants in China, Korea, Northern Italy, France, India, the U.S. and Canada as well as in Portugal and Taiwan. So we saw the crisis loom probably earlier than most. There's no book on managing operations through a pandemic, but Velan was very quick in implementing sanitary measures, social distancing, health surveys, protocols in case of outbreaks. And so far, our record in maintaining a safe work environment as possible is something I'm very proud of. We're seeing how safeguards can be raised even further as we need to remain extremely vigilant observing that most countries are experiencing a second wave resurgence of COVID-19. We're a supplier of critical equipment to essential industries. So in that sense, we're spared the most devastating impact of the crisis, but we could not avoid the consequences of a lockdown in our Indian supply chain that affected and continues to affect the production flow in many of our plants, particularly in North America. On the other hand, we did a very good job managing the impact of the pandemic, both from a risk mitigation point of view, making for example, swift decisions, shifting supply sources and, of course, managing our costs. In that regard, I'm very grateful to everyone in our company, namely our Board members, leaders and employees who accepted a salary cut in our North American operations. In addition, we reduced our administrative expenses and, more importantly, found ways to pursue the deployment of our V20 agenda with far reduced expenses and resources. Where the global recession has hit the hardest, as I reported in July, our MRO bookings or nonproject valve, heavily dependent on a healthy oil and gas sector. We continue to see distributors' behavior heavily slanted towards protecting cash and therefore, stocking down. We believe, of course, this trend to be temporary, but can't predict when stocking orders from our distribution channel will surge back. This brings me to talking of the business achievements and progress made in our V20 transformation. The 5 priorities of our V20 transformation, if I remind our listeners are: First of all, increasing the focus on our customers through the creation of strategic businesses out of our North American operations, that happened 2 years ago; secondly, reorganizing our manufacturing footprint in North America, reducing our number of plants from 4 to 3 and making the remaining 3 more specialized manufacturing centers; thirdly, a leaner and faster production model, reduced dependency on in-house machining; fourthly, transferring commodity products to lower cost sites like India; and last but not least, modernizing our systems and processes. As I reported exactly a year ago, we were expecting the benefits of V20 to start kicking in towards the end of fiscal '21. We're now halfway into fiscal '21 and are witnessing a few key wins already. Let's start with bookings and our increasing backlog. By creating the strategic businesses, we were aiming to improve the effectiveness of our market strategies with consistent targeting distinct niches or applications where our superior products and technologies capabilities stand out and then focus on meeting our end-users' tough requirements. The success in our bookings this year is a perfect example of the strategy. For example, in severe service, we're seeing a surge of orders through targeting distinct license or approved applications. We're also here very much helped by our strong market presence in China and Southeast Asia in that regard, where the economy has not slowed as strongly as in the western markets. Our French operations continued to record strong bookings, not only in nuclear but also in special niches where their capabilities stand out. And despite an incredibly adverse economic environment, namely the oil and gas industry, our Italian operations have successfully registered a string of orders totaling $30 million in the FPSO sector, that's floating production storage offloading. That's what FPSO means. And I refer you to the press release issued this morning to read more about it. We're facing very high uncertainty in the coming months, and we can't foresee whether the momentum in our market efforts, despite the crisis, will be maintained, but we're very happy to see our backlog climb by near 14% since the beginning of the year. With V20, we're also aiming to significantly improve the margins of our project manufacturing business in North America. This is exactly what's happening and one of the key factors contributing to our year-to-date gross margin of 24.4%, exceeding that of last year by 1.2 points. Why is that? I'll mention 3 key factors. First of all, an improved product mix, helped in part by the growth in our higher-margin severe service valves sales, reduction of structural production overhead costs with the closing of operations in 1 of 2 Montreal plant, 6 months earlier than planned. In that regard, the acceleration of the closing of plant 2/7 allowed to conclude the sale of the property this year rather than in fiscal '22. Indeed, the sale of our Montreal plant on McArthur Street was completed during the quarter and will be effective October 31, 2020. Gross proceeds will be $13.3 million, and all underlying conditions for the sale were satisfied. With this important milestone, we're significantly reducing structural costs in our North American operations, a benefit that is materializing this year, but we'll have a full year effect in fiscal '22. As I said last year, to explain why we were seeing a reduction in project bookings at the time, which we anticipate it to be a temporary situation. We have become a lot more selective in project bidding, and our sales and quotation team carefully apply a new pricing discipline, which is helping our margins as well. Of course, the transfer of commodity valves to India will also contribute to improved margin as we are nearing the completion of this important aspect of our plan. Last but not least, speaking of V20, the shift in our manufacturing model towards achieving leaner and more agile operations in North America is an ongoing initiative, and we're not there yet. This shift requiring new processes and adaptive capabilities, along with COVID-driven disruptions, the move of machinery, the accelerated closure of plant 2/7, combined in causing the production delays that I referred to earlier. As a summary, I'm very thankful that we: a, started our V20 transformation a year before the pandemic erupted; and b, found ways this year to accelerate its deployment at lower costs. This, along with the increased backlog, provides Velan with a lot more resilience and agility going into the last 2 quarters of fiscal '21 and then, of course, into fiscal '22. To conclude on the business update, we're reporting very encouraging signs of improving the core fundamentals of our global business. But we're not out of the woods yet, fighting through an indefinite global economic crisis, remaining vigilant during the unrelenting pandemic, with still much to do to successfully adapt our North American operations to a new manufacturing model. Our employees with whom Bruno Carbonaro, our President, and I are constantly communicating are energized and up to the challenge. In May, I said our aim was to get out of the storm stronger than before it hit the world economy. Let me just say that I like our odds. Now I'd like to say a few words about the changes announced yesterday in our Board of Directors. And if you allow me, I'll read from the press release that came out end of day yesterday. We're announcing that we're appointing James Mannebach as the new Chairman of the Board. The outgoing Chairman of the Board, Tom Velan, will continue to serve as a Director of the company. Mr. Mannebach joined the Board in 2018, and he is the first independent Chairman of the company. His experience in the valve and flow control industry is impressive. He's worked at Emerson Process Management, Xomox, Fisher Controls and Roper Technologies and IMI as well. Rob Velan has been appointed Vice Chairman of the Board as the Velan family continues to move from the second-generation leadership to third-generation and independent leadership. Rob has served on the Board since 2013, and he is the Executive Vice President of MRO and Aftermarket, one of the company's strategic business units. And Rob reported to me until recently when Bruno joined us as President. He now reports to Bruno, our President. Bill Sheffield has been appointed Chair of the Audit Committee, a position he previously held. And it was previously held by Jim Mannebach. Bill Sheffield was previously Lead Director, a position that is no longer required due to the appointment of an independent Chairman and he was Chair of the Corporate Governance and Human Resources Committee succeeded by Dahra Granovsky, who joined us back in 2019 as a Board member. Tom Velan, who has been Director since 1976 and Chairman since 2015 will, in addition to being a Director, serve as an adviser to the Chairman, to myself and work on various matters at their request -- at our request. Tom will also continue to be involved with some of the subsidiary companies. Why are those changes important? I'll get back to my own address. Let me give you my perspective. First of all, with Tom, Rob, as our new Vice Chairman and Ivan Velan, the family is still very present on the Board. With Jim, the Chairman, the Board dynamics are changing and reflect where we're going as a company. Jim is very much a growth person and his background and track record in the valve industry, but also in other industrial fields, tells the whole story. He'll be a value adviser in defining the post V20 strategic path, something Bruno and I are devoting a lot of attention to, and I very much look forward to working with Jim and supporting him in his important new role. As far as Tom is concerned, well, this is not the end of anything, but rather the beginning of a new period where I anticipate being able to benefit even more from him, his counseling as he's freed up from the demanding duties of the Chairman role. As we turn our attention to planning our post pandemic growth, I expect Tom to continue and support me and my team with his deep knowledge of the industry and of our products. I never hesitated to pull him in strategic product discussions, tough business issues or meeting new customers, and I told him he should expect more of that coming. All in all, I hope the market sees into the announcement something more significant than a rotation enrolled within our Board the same way I do. As we complete V20 deployment in the course of the next few months and manage through a global recession, we're entering a new phase in our company's evolution, and I look forward to our Board of Directors' continued exceptional contribution in building our future. Thank you very much. Now Rejean, John and I are ready for your questions.

[Operator]

[Operator Instructions] [Foreign Language] [Operator Instructions] And gentlemen, I show no questions at this time. I'll turn the call back over to you.

[Yves Jacques Leduc, CEO & Director]

All right. Thank you very much for your attention. I look forward to the next quarter and to hearing your feedback and until then, have a great long weekend, if you're a Canadian, and stay safe and healthy. Thanks for your attention.

[Operator]

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. [Foreign Language]