Velan Inc

TSX:VLN

Earnings Call Transcript 2022-Q2

[Operator]

Greetings, and welcome to the Velan Inc. Q2 Financial Results Conference Call. [Foreign Language] [Operator Instructions] [Foreign Language] As a reminder, this conference is being recorded Thursday, October 7, 2021. [Foreign Language] I would now like to turn the conference over to [Foreign Language] Yves Leduc, CEO. [Foreign Language] Please go ahead. [Foreign Language]

[Yves Jacques Leduc, CEO & Director]

Good afternoon. [Foreign Language] Welcome to our second quarter fiscal year 2022 conference call. I'm joined today by Benoit Alain, who just completed his first full quarter as our CFO. I will start with a brief summary of our results, followed by a more detailed discussion of our business situation. We'll then open the line to your questions. I'm very pleased with our best quarterly results in years, but I'm certainly not surprised. We're seeing the convergence of many of the positive factors reported in previous quarters, whose effects had either been slowed by the global economic crisis or were simply expected to materialize over time. Our second quarter's improved results were driven by a notable increase in sales, a more profitable mix of delivered products as well as the margin improvement activities undertaken over the past fiscal years within the scope of the V20 transformation plan. Let's have a closer look at our results. Net income amounted to $5 million or $0.23 per share compared to a net loss of $5.1 million or $0.24 per share last year. EBITDA amounted to $10.7 million or $0.49 per share compared to a negative $2.5 million or $0.12 per share last year. So that's a jump of close to $13 million in EBITDA versus last year's quarter. Improvement in EBITDA for the quarter is primarily attributable to an increase in gross profit, which I will explain shortly, the absence of restructuring and transformation costs in the current fiscal year, which totaled $1.7 million in the second quarter of last year and a reduction in other expenses of $1.4 million for the quarter due to the land cleanup costs of a former factory incurred in the second quarter of the prior year. These favorable factors were partially offset by a decrease of $1.4 million in federal wage subsidies received in the quarter compared to last year. A general increase in administration expenses that have been significantly lowered when the global pandemic broke out last year as well as an unfavorable movement in income taxes. I will elaborate later in the business discussion on the factors that explain the rapid improvement in our gross profit percentage that increased from 25.0% to 30.8% for the quarter. For now, I observe that the improvement in gross profit percentage mainly resulted from the higher sales volume and of course, the margin improvement activities implemented over the course of the past fiscal years within the scope of the V20 program. We also benefited from favorable movements in unrealized foreign exchange translation, mainly attributable to the fluctuation of the U.S. dollar against the euro and the Canadian dollar for the quarter when compared to the prior year. And importantly, let's remember that the increase in gross profit was such that it could more than offset the impact of a lower amount of Canadian Emergency Wage Subsidy of $1.7 million for the quarter compared to last year. Sales. Sales for the quarter amounted to $101.9 million. That's an increase of $33.6 million or 49.1% from the prior year. Sales were positively impacted by North American operations, increased large project order shipments, mainly destined for the petrochemical and power markets. Our Italian operations were able to overcome most of the shipping hurdles experienced in the first quarter. We achieved notable progress in reducing our North American operations production delays caused by the many changes deployed during the first year of the pandemic, and both our Indian and Chinese operations are having a record production year.The quarter's strong sales performance covers for our weak first quarter, which had been sales -- which had seen sales basically at the same level as the first quarter of the fiscal year of last year. Indeed, sales for the first half of the year, the first 6 months, at $176.4 million are 22% ahead of last year's performance. Meanwhile, still experiencing one of the highest backlogs in years, we did see a slower quarter, whereby bookings decreased by 19.7% or 19.5% compared to the same quarter last year. This decrease is relatively -- is relative to the sizable project orders recorded by our French and North American operations in the same quarter last year. Note however, that bookings have outpaced billings so far this year, as evidenced by a 1.12 book-to-bill ratio for the 6-month period. Other good news, we are observing a recovery of our North American MRO business, which had been the most gravely hit last year when the global pandemic broke out as our distributors are steadily increasing their stock. Finally, we ended the period at a -- with a backlog of $575.8 million, an increase of $13.3 million or 2.4% since the beginning of the current fiscal year. Our net cash balance at the end of the quarter was $68.1 million, an increase of $5.2 million or 8.2% since the beginning of the fiscal year. The net cash per share at the end of the quarter was USD 3.16 or CAD 3.98. Let's now move to our business situation and begin with the business environment. We're seeing a very good business momentum, as you can see, but we continue to face some important challenges. First, on the business environment, overall, the economy is, I would say, fair. There are definitely no signs of a booming recovery. CapEx demand worldwide is rather soft, which explains in part why we've seen a slight slowing of our bookings in the second quarter. On the other hand, as I mentioned, we see positive signs of recovery in the North American MRO business. But in general, and oddly, in many aspects, the economy is behaving as if it was hot with the following factors affecting our operations: significant turbulence in global supply chain, that mainly exploding cost of containers and longer transit times are affecting all of our subs; commodity metals prices have greatly increased since the beginning of the year; in China, we're seeing severe shortages in power supply that are directly causing our suppliers to suspend activities to save energy; the labor market is very tight. It's not easy to recruit talent, although I believe we've been managing that situation quite well. Overall, faced with all those challenges and turbulence, I must say our teams have done a great job dealing with them, negotiating, for example, long-term agreements with our suppliers or planning capacity as far ahead as possible. On the subject of the tight labor market, the Canadian Emergency Wage Subsidy has played a huge role last year in preventing layoffs that would have significantly weakened the company and possibly seriously hinder our ability to rebound this year. We expect to receive far less subsidies this year as our sales are recovering. And I am very thankful for the fact that we kept our staff and sales force and employee base stable last year, without which we would have really been hurt by the booming talent market. On the operations front, we're making progress, but we need more time to hone the new production model that we deployed through V20 in our remaining 3 North American plants that are now centers of gravity for our severe service, project manufacturing may be businesses as well as the North American nuclear industry. So yes, we are facing important challenges, but I want to come back to one of the most important aspects of our performance, mainly the sustained growth in our margins. The quarter's gross margin and the first 6 months gross margin were the highest recorded in at least 10 years at respectively, 30.8% and 29.1% compared to 25% and 24.4% last year. That's a jump of 5 points and compared to 23.3% at the end of fiscal year 2019, when our V20 plan was announced. Going less than 3 years, we have jumped -- increased our gross margin by more than 7 points. Here again, there should be no surprise that the main goal of the plan was to drive our North American operations margins up and we are indeed meeting the goal through the elimination of significant structural costs in North America and now completed the transfer of our small forge valve production to India, and the much greater focus put on profitable orders from our new strategic businesses. As a result of those improvements and the growth in sales to which each of our divisions is contributing, our EBITDA after 6 months improved, as you heard, by more than $13 million compared to the same period last year -- sorry, $10 million. It was $13 million for the quarter, but $10 million for the 6-month period. Simply put, thanks to the relentless efforts and resilience of our employees in the last years, we are laying the base for a return to profitable growth. Now armed with a strong backlog and revitalized margins, I want to take a pause here and remind you of the road traveled in the last couple of years as we deployed our transformation plan in the midst of a global crisis. I want to highlight 5 areas that show, as I predicted last year, that we are coming out of the storm stronger than when it hit us. First, we are very proud of our health and safety record, knocking on wood, as we avoided since the beginning of the pandemic back in March 2020, a spread of the virus at each of our locations, a reminder that, as I usually say -- often say that our manufacturing footprint matches the original itinerary of the virus. We have plants in China, Korea, Northern Italy, France, India, Quebec and the U.S. in particular. But we've done a really good job of doing whatever we can to protect our employees and make the work environment as safe as possible. Second, with V20 mostly behind us in many ways, we're already a transformed company. We have near-record margins, significantly reduced manufacturing fixed costs and are seeing a recovering financial health of our North American operations, where our new production model is on a steady gradual ramp-up, finally, near record backlog to which all of our divisions are contributing. Third, speaking of our global operations, we're clearly observing a new emerging global culture where Velan becomes increasingly adept at leveraging its global assets and capabilities worldwide. Clearly, that's one of the benefits of our V20 plan. For example, we have simplified strategic deployment across 5 strategic businesses, each with clear and distinct purpose and market focus; achieved new levels of interdivisional cooperation to win business; reduced the complexity of our operations; and our fast-growing Indian and Chinese operations will anchor future growth efforts in the region. Fourth, we are pursuing the path of modernizing and digitizing our operations. Having completely revamped our ERP environment, equipped ourselves with distinctive competitive assets like VPM, Velan Project Management, and continued investments supported by our IT strategic agenda. Finally, a renewed bench strength and leadership capacity. We recruited a lot of new talent in the last year, including Bruno Carbonaro, our new President, with less than 2 years and doing great. And of course, our new kid on the block, our new CFO, Benoit, who has learned our business incredibly fast in just a few months. Many other employees in key leadership positions are [indiscernible]I take the opportunity once again of recognizing the great resilience and efforts of all of our shop employees, who showed up every day making valves since the beginning of the pandemic. In North America, we've received great engagement from our unionized employees and their leaders in deploying V20, for which I'm extremely grateful. So to conclude, this does not mean we're out of the woods. The global pandemic is far from over. We remain vigilant, committed to maintain our excellent record and keeping our work environment as safe as possible for our employees. Meanwhile, because of a number of external challenges and the tough economic environment mentioned earlier, driving growth will require ruthless focus and execution, but we are aware of those challenges. We take nothing for granted and building on our recent achievements, are moving ahead with confidence. I will now hand it over back to our moderator to answer questions. [Foreign Language]

[Operator]

[Operator Instructions] [Foreign Language] And gentlemen, there are no questions at the present time. [Foreign Language]

[Yves Jacques Leduc, CEO & Director]

[Foreign Language] So let's wait 10 seconds just in case.

[Operator]

[Operator Instructions] [Foreign Language] And there are no questions. [Foreign Language]

[Yves Jacques Leduc, CEO & Director]

Okay. So this was an easy conference call, easier than usual. Thank you for your attention, everybody. [Foreign Language] We will see each other next quarter. 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. [Foreign Language]