Velan Inc

TSX:VLN

Earnings Call Transcript 2023-Q2

[Operator]

[Foreign Language] Greetings, and welcome to the Velan Inc. Q2 2023 Financial Results Conference Call.

[Foreign Language] [Operator Instructions]

[Foreign Language] As a reminder, this conference is being recorded, Friday, October 14, 2022. I would like to now turn the conference over to Bruno Carbonaro.

[Foreign Language]

Please go head.

[Bruno Carbonaro, executive]

Hi, everyone. Thank you for joining our conference call today. Let's start by presenting the usual disclaimers. Now let's proceed with the -- the first section of this disclaimer provides an analysis of our consolidated results for the quarter ended August 2022. The Board has approved these results today, October 14, 2022. The second paragraph refers to non-IFRS and supplementary financial results, which are reconciled at the last page of this presentation.

Finally, the last paragraph refers to forward-looking information, which are subject to risks and uncertainties and are not be guaranteed. The forward-looking statements contained in this presentation are expressly qualified by this cautionary statement.

Now let's proceed with the call. Welcome to our second quarter fiscal year 2023 conference call. I am joined today by Rishi Sharma, our CFO. This presentation will be made available following the call on our website in the Investor Relations section.

I will start with a brief summary of our results for Q2 followed by a closing comments. We will then open the line to your questions. As usual, we summarized the key highlights for Q2 in 1 slide. That's -- the first item is on sales $85.1 million sales, which is an improvement of $10 million above Q1 with a decrease of $16.8 million versus Q2 last year. The 2 main explanations are: a, the impact of the exchange rate variations between the dollar and the euro because a lot of our sales are recorded in euro and translated back into U.S. dollar. And the second fact is that last year, we enjoyed very strong shipments in the Q2 in some of our urban operations that were not repeated this year.

This $85.1 million sales translated into a $1.4 million EBITDA, which is better than the $2.9 million losses posted in the previous quarter, but lower than the $10.7 million achieved last year and we'll show you a bridge to explain to you the variation between last year and this year. This translates into a $3.7 million net loss for the quarter. On the more positive side, the size of the backlog is still extremely healthy, and we will expand on that in the next slide. Our cash position remains strong at $29.7 million.

Let's now comment the backlog, and you see that it has decreased slightly from a little bit above $500 million to $477 million. And this is mainly due to the translation in USD of our backlog in euros for our French and Italian operations. That is interesting, and you can see that on the right-hand side of the slide is that the shippable backlog in the next 12 months has increased from $325 million to $347 million, which means that we enjoy a very strong visibility on the next 12 months. On the book-to-bill ratio, if I start from the beginning of the fiscal year, so on the first half of the year, we still have a book-to-bill ratio above 1.

The bookings for the quarter stood at $73.5 million, which is a decrease of 10% versus the same period last year, that's not only being impacted by the geopolitical uncertainties, which creates some sluggishness in the award of different projects by our customers. We continue to observe a very strong activity in terms of quotation that should translate into favorable bookings for the second half of the year.

I now hand over the mic to Rishi that will show you more details about the accounts of the Q2.

[Rishi Sharma, executive]

Thank you, Bruno, and good afternoon, everyone. So first comment, I would really like to stress the importance on the recovery on the performance versus Q1 where we saw an increase of $10.1 million or 13.4% across the globe and all of our divisions over the Q1 performance that we reported just a few weeks ago. It's noteworthy to mention that we also did suffer for some shipping and logistical delays in which an $11 million of order was shipped in the month of August, but not recorded in our revenues for Q2.

If we look at our comparatives to Q2 of the prior year, there was a decrease of $16.8 million or 16.5% compared to the same quarter last year. The negative effect and the weakening of the euro average rate against the U.S. dollars for the quarter amounted to $6 million for the second quarter of last fiscal year. This total was about $10.5 million for the first half of 2023 versus the first half of 2022.

As mentioned by Bruno, we also saw some lighter activity than the previous year in our European operations, mostly in Italy, destined for the upstream oil and gas sector as we compare that to the prior year performance. The decrease is also attributable to the timing of delivery dates on open orders caused by lower bookings recorded in the second half of full year 2022.

On EBITDA, similar story, I'd like to mention that there was a good recovery from Q1 that we are happy to report, going from a loss of $2.9 million in Q1 to a profit -- positive EBITDA of $1.4 million, which is in line really with our historical trend of a slower start to the year. We also mentioned that we did not record the profit on certain large contracts shipped during the month of August, but not recognized in the quarter.

If we look at the EBITDA of $1.4 million for the quarter compared to the EBITDA of $10.7 million last year, the decrease is primarily attributable to the gross profit on the volume reduction, along with an increase in administration costs for the quarter. Although our gross profit increased by 80 basis points over Q1, our gross profit did decrease by 320 basis points compared to last year's second quarter. The decrease in gross profit percentage for the quarter is primarily attributable to the lower sales volume, as we mentioned on the previous slide, which impacted the absorption of our fixed production overhead. The decrease in profit was also due to the unfavorable effect of the product mix that we delivered in Q2 of this year.

Administration costs for the quarter amounted to $24.7 million, an increase of $0.7 million or 2.9%. The increase was mainly driven by an increase in our reassessment of our long-term asbestos liability for which we will discuss shortly. The increase is also due to higher outbound freight costs as we saw in Q1, however, it's noteworthy that we see a rebalancing and a normalized trend in our freight cost for the current quarter as compared to what we saw in Q1. The increase for the quarter was also offset by lower commissions on the lower sales activity as a result of larger sales orders that we delivered in the prior year.

If we move to net cash, our net cash amounted to $29.7 million for the end of the quarter, which is a decrease of $23.7 million since the beginning of the fiscal year. The decrease here is purely temporary in timing related to noncash working capital items, and we expect these items to be recovered during Q3 and Q4 of the current year. The overall availability for the company remains strong at over $110 million for available cash on hand and facilities available to the company. It's important to note that the increase in our AR is due primarily to the strong proportion of the Q2 revenues being recorded at the tail end of the quarter, in line with the collection terms that we have with our customers, and we do expect and have seen these amounts collected in the early part of Q3.

I'll turn it back over to Bruno now for the closing comments on Q3 -- Q2, sorry.

[Bruno Carbonaro, executive]

Thanks, Rishi. I think my comments as follows: First is that we still have a global macro environment, which is not very favorable and it remains challenging because the uncertainty is high. So we need to protect against any downside that we can see. But the good news for us is we enjoy a very strong visibility, thanks to our very strong backlog and the strong pipeline we're seeing on the market right now.

So here, what we need to do is to focus on execution. That's my top priority. Most of our destiny is in our hands. And we actually need just to execute our projects on time and at cost to deliver the value that we expect from them. We are extremely confident there will be a strong second half of the year, thanks to this very solid backlog. The key objective for the team is to maintain the strong liquidity position we have and to do that to be better manage our working cap which most probably is one of the big disappointments of Q2.

This being said, I open the line for questions.

[Operator]

[Foreign Language] [Operator Instructions]

[Foreign Language] [Operator Instructions]

[Bruno Carbonaro, executive]

Okay. If there are no questions, I think we can adjourn.

[Operator]

If there are no questions, we end the [Foreign Language]

[Bruno Carbonaro, executive]

I suggest we stop if there is no questions, but we are more than happy just to answer any question in private if you may have, Rishi is putting [indiscernible].

[Operator]

[Foreign Language]

That does conclude the conference call for today. We thank you very much for your participation and ask that you please disconnect your line.