Velan Inc

TSX:VLN

Earnings Call Analysis

Earnings Call Transcript 2025-Q2

[Operator]

Good morning. My name is Joelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the conference call. [Operator Instructions] Mr. Rishi Sharma, Chief Financial Officer, you may now begin your conference.

[Rishi Sharma, executive]

Thank you, operator. Good morning, and thank you for joining us for our conference call. Let's start by discussing the disclaimer from our related IR presentation, which is available on our website in the Investor Relations section. As usual, the first section mentions that the presentation provides an analysis of our consolidated results for the second quarter ended August 31, 2024.

The Board of Directors approved these results yesterday, October 10, 2024. Second paragraph refers to non-IFRS and supplementary financial measures defined and reconciled at the end of the presentation. The last paragraph refers to forward-looking information, which are subject to risks and uncertainties that are not guaranteed to occur.

Forward-looking statements contained in this presentation are expressly qualified by this cautionary statement. Finally, all amounts are expressed in U.S. dollars unless indicated otherwise.

I now turn the call over to Mr. Jim Mannebach, Chairman of the Board and CEO of Velan.

[James Mannebach, executive]

Thank you, Rishi, and good morning, everyone. Please turn to Page 4 for a general overview of the second quarter. Velan's strong momentum continued in the second quarter of fiscal 2025 with a robust financial performance across the board. Bookings and sales grew by more than 60% and 20% year-over-year, respectively, driven by solid contributions from multiple sectors, including nuclear power defense and oil and gas, levering our diversified portfolio, global reach and sustained differentiation in key market segments to deliver remarkable growth.

In terms of bottom line, the quarter marked a significant improvement with net income of $100,000 compared to a loss a year ago of $2.1 million. Equally important, we reported cash flow from operations of $10.1 million in the quarter and $15 million after 6 months into the fiscal year. If you recall, we had plunged to improve cash flow generation by taking advantage of the global scale of our business, maximizing our strategic procurement possibilities and optimizing working capital around the world.

Clearly, we're encouraged by the hightened quality of execution across the organization. Now if you turn to Slide 5, please. We announced last month, a main services agreement with GDH SMR Technologies Canada Limited for the provisioning of high-quality proprietary products and services to supply a stand-alone small modular reactor SMR for Ontario power generation.

Under the terms of the agreement, Velan will provide GEH with the development of unique advanced technology engineered support and leading-edge bells essential to the safe and efficient operation of its first SMR. The initial order has a provision for 3 additional units to be deployed with completion expected by 2034.

In short, Velan has established a first-mover advantage to supply future SMRs with proprietary valve technology and technical expertise in Canada, the United States and indeed goals. We're very well positioned to support this landmark project as well as those of all solution providers around the world to help shape the future of nuclear energy landscape through the new SMR technology.

The latest announcement comes on the heels of a CAD 50 million 10-year allowance agreement with Bruce Power last quarter for asset management and life extension of nuclear projects in Ontario. In addition, we've signed a memorandum of understanding with Westinghouse to support nuclear new build projects in Canada and around the world. Westinghouse, as many of you know, is a significant player in the nuclear power market with roughly 50% of the global reactor fleet.

It's also actively developing the SMR and microreactor notches based on its proven technology. This MOU offers belong significant growth opportunities for its valve and flow control equipment through this important strategic partnership. Finally, we publicly stated our full support behind Canadians for Canada. A campaign to promote the deployment of [ Candu ] nuclear technology at home and abroad in support of Canadian and global efforts to reach net zero emissions.

Velan is proud to have these products installed in every candopower planted operation and will continue to support its development. Our maiden Canada nuclear valves remain a reference in the industry. We intend to remain a significant player during this new super cycle of nuclear power grows. The recent events involving Velan growing momentum within the nuclear power sector as the energy source is increasingly being relied upon as a viable alternative to fossil fuels.

Certainly, clean energy sources like nuclear power will be part of the mix of renewables, helping customers worldwide, reach their net zero objectives. Moreover, related electrification and goals around the world had not been met without a rapidly growing role for nuclear technology.

Moving to Slide 6. Our order backlog reached $548 million at the end of the second quarter, up 11.5% from the beginning of the fiscal year on the strength of solid bookings. At quarter end, just over 72% of the backlog representing orders of nearly $396 million are deliverable within the next 12 months. Consequently, we are in an excellent position at the halfway mark in the fiscal year to achieve our sales growth objective for the full year.

Importantly, bookings improved 63% year-over-year, up to $117 million in Q2. The substantial increase reflects higher bookings in North America driven by new projects in the nuclear sector as previously mentioned, such as the agreement with GH and orders for our MRO business as well. We also benefited from higher bookings for oil refinery projects in Germany as well as for nuclear power and defense markets in France.

The factors -- these factors were partially offset by reduced oil and gas orders in Italy, which had recorded large orders as you'll recall in the second quarter of the prior year. Given that bookings continue to outpace sales, our book-to-bill ratio rose to 1.18 at the end of the quarter and 1.29 for the first 6 months.

To wrap up, Velan's strong momentum continue into the second fiscal quarter of 2025. Most, if not all, of our key performance indicators are flashing green on our management dashboard. Our backlog bookings, sales, EBITDA, cash flow, all key metrics are up year-over-year. So we're entering the second half teaming confidence to further improve on our financial and operating performance.

Before turning the call back over to Rishi, I want to add that I'm very proud of our team's achievements during the past 12 months. We were a bit distracted by external forces a year ago. We've made great efforts building our strong heritage to regain our strategic impetus that's resulted in robust bookings and backlog growth.

The enhanced quality of execution in turn is now filtering down to our financial performance, as I've just commented on. A sincere congratulations to my colleagues at long throughout the world for their confidence in our company and unwavering dedication to our customers. Similarly, we've witnessed a sharp improvement in our share price, which, as you know, has gained more than 50% since the beginning of the calendar year.

Granted, we are still far removed from Velan's all-time highs, and we're not satisfied at this point. But more than ever, we're pulling in the same direction for all -- to the benefit of all of our shareholders.

Rishi i'll turn the call back over to you for comments on the financial review and performance this quarter.

[Rishi Sharma, executive]

Thank you, Jim. Good morning, once again to all. Turning to our quarterly results on Slide 8. Sales totaled $98.6 million, up 22.8% from the same period a year ago. As previously mentioned, the growth was mainly driven by increased shipments from our diverse businesses in Italy, France and North America.

The sales also increase also reflects a nonrecurring revenue gain of $5.2 million related to a canceled agreement with a customer during the second quarter. These factors were partially offset by lower MRO shipments in North America. Currency movements meanwhile, had a $0.6 million negative effect on the sales in the quarter.

By customer geographic location, North America accounted for approximately 40% of sales in the second quarter of fiscal 2025 compared to 46% last year. For its part, Europe represented nearly 30% of revenues on the strength of increased sales in Italy and France versus 26% a year ago.

Asia Pacific at 17%, Africa and Middle East at 13% as well as South and Central America at 1% rounded off the Q2 2025 sales breakdown. Moving on to gross profit on Slide 9. It amounted to $26.7 million in the second quarter of fiscal 2025, up 14% from $23.4 million last year. The increase was primarily due to higher sales volume, which positively impacted the absorption of fixed production overhead costs and a more favorable product mix compared to last year.

These factors were partially offset by higher inventory provisions. As a percentage of sales, gross profit reached 27% compared to 29.1% last year. Excluding the impact of the nonrecurring revenue gain mentioned earlier, on which no gross profit was recognized. Gross profit as a percentage of sales would have attained 28.5% in the second quarter of fiscal 2024.

Administration costs totaled $24.8 million or 25.1% of sales in the second quarter fiscal 2025 compared to $22.6 million or 28.1% of sales a year ago. Last year's cost included $0.3 million in expenses related to the proposed transaction with Flowserve Corporation.

The year-over-year increase in administration costs can be mainly attributed to higher sales commissions due to higher business volume. EBITDA amounted to $5.1 million in the second quarter of fiscal 2025, compared to $3 million last year. Excluding expenses related to the proposed transaction, adjusted EBITDA reached $3.3 million in the second quarter last year.

The year-over-year growth was mainly driven by higher sales volume and improved gross profit, partially offset by increased administration costs. We achieved an important turnaround in profitability with net income of $0.1 million or $0.01 per share in the second quarter of fiscal 2025 compared to a net loss of $2.1 million or $0.10 per share last year. The year-over-year improvement can be primarily attributed to higher adjusted EBITDA this year compared to last.

Turning to Slide 10. The cash flow from operations reached $10.1 million in the second quarter of fiscal 2025, compared to cash flow usage of $21.2 million a year ago. The significant improvement in cash flows was mainly due to more favorable changes in nonworking cash working capital items, movements and higher EBITDA.

As a result, this additional cash available to repayment of long-term debt, $2.5 million in the second quarter and $6.4 million since the beginning of the fiscal year. Finally, our financial position remains solid. As at August 31, 2024, the company held cash and cash equivalents of $44.5 million and short-term investments of $4.8 million while long-term debt including the current portion amounted to $22.6 million.

Our positive net cash to support investments in strategic growth areas such as the expanding SMR nuclear power market that Jim alluded to earlier. Thus creating sustained value for all shareholders.

Turning to our outlook on Slide 11. [ Velan ] delivered strong first half results marked by our highest order backlog in 3 years of $548.1 million at a book-to-bill ratio of 1.2. As noted earlier, orders of $395.9 million at the end of the second quarter are expected to be delivered within the next 12 months.

Looking ahead, we anticipate this strong momentum will continue in the second half. And accordingly, we are maintaining our sales growth outlook for the fiscal year.

I would now like to turn the call over to the operator for the Q&A session.

[Operator]

[Operator Instructions] Your first question comes from Alex Carnelli with SM Investors.

[Unknown Analyst]

Congratulations on the results. You guys don't break out volume and pricing, correct?

[Rishi Sharma, executive]

Sorry, Alex, can you please repeat?

[Unknown Analyst]

Sorry, you guys don't break up revenues in terms of volumes and pricing. How -- if there's any color on that you could give?

[Rishi Sharma, executive]

No, we don't -- I mean, we do comment essentially volume and the effects on profit with absorption. We don't necessarily talk about market-specific pricing it's quite sensitive, and we need that.

[Unknown Analyst]

You guys are signing all these nuclear contracts, which is great. I'm assuming the Western Gas is new. What is I just wanted to ask what is your TAM that you think for nuclear? And I understand that could expand over time. But where do you look?

[John Ball, executive]

Yes, that's a great question. It's -- I think the way to answer it is to determine or to size the available market in nuclear, is very, very difficult at the moment because SMR, which everyone is believing is going to be a tremendous catalyst for growth in the industry over the next several decades.

It's still at it's nascent stage. It's -- and so to put your arms around how big that market could grow to is going to be challenge, let's put it that way. I think what's important and you referenced the agreements that we have in place with Westinghouse, which we've had a long-standing relationship with us as well. As well as Bruce and OPG and GEH with DEF. What's very, very important to recognize is that no matter the supplier of the nuclear technology solutions to the builder of Legacy or SMR. Alan is on board, and we're onboarding critical applications.

So whatever the total market grows to, we expect we have a very good position to hold not only our fair share but to increase our penetration.

Okay. So again, I know it's kind of a vague answer in some ways, but to later hands on the size of the available market going forward is difficult but taking confidence in the breadth of our relationships across the industry assures that we're going to be a major player.

[Unknown Analyst]

So the Western Gas is -- can I view it as an extension of -- past agreements and then increasing penetration. That's how I should read it?

[James Mannebach, executive]

Well, as I mentioned, we've had continued to enjoy relationships with every major provider. I think that with developing SMR technology, we have proprietary technology that's very, very interesting across the market. And in terms of our installed base and service and extension of loss of legacy. Yes, we're Westinghouse is that one of the others are in. Again, we're there.

So that answers your question. I think you might remember, and we've talked about this, I believe, in the past, that Velan is more than 50 years, has been a pioneer in the nuclear area. And one of the great advantages we have over competition is our long-standing position in this industry and our reputation for unsurpassed quality and once on board, it's the preferable the most to continue with us.

So we'll be able to exploit the installed base. We often look to SMR, but I think it's very, very important to watch what's developing in the industry about life extension and renewal again, that bodes well for our position in the market given our installed base.

[Unknown Analyst]

Well, then I'll ask about 3-mile Island and the [indiscernible]. If I remember correctly from what I read, you guys are in almost 90% of the reactors out the world. So I'm assuming that you might be able to participate at in the refurbishing of Fremile Island and [indiscernible] when those open. Is that correct?

[James Mannebach, executive]

Absolute Yes, absolutely.

[Unknown Analyst]

You guys gave the financial about Bruce Power, but nothing around GEH. I can see the backlog and the bookings. So -- would that be a good -- decent indication part of that for the content initial content, GEH SMRs or...

[James Mannebach, executive]

I think there was a press release marched yesterday, that identified with GEH, the additional development contract. And then also reference to follow-on awards that obviously, depending on good performance as it would always be the case that we can look forward to. We're not disclosing much around the specifics because it's competitive information.

But suffice to say that the backlog even certainly does not recognize the full of the potential.

[Unknown Analyst]

No, I was just asking if you recognize the initial part. But I understand the other 3 or even part of the first. I'll ask you, this is now a different area. I see that the North Africa and Middle East grew, I'm assuming that's also part of the joint venture with Italy.

I'm assuming part of that is Saudi Arabia. Are there any risks from the conflicts in the Middle East on those.

[James Mannebach, executive]

The first thing that comes to mind is probably a logistics risk. There still is disruption in the Suez Canal that causes some implications for our supply chain, especially the European in terms of war would break out a full-scale war, which might be what you're alluding to, obviously, that represents a risk for us. But -- in that event, of course, our company would be more concerned about the safe colleagues in front around the world, the immediate repercussions for us in terms of marketplace. But I don't think that -- if we look specifically, let's say, to Israel, there's much exposure for us at the moment.

So it's hard to say. We're watching developments like everyone else's for multiple reasons.

[Operator]

Your next question comes from Sebastian Charlene with Odyssey Capital.

[Unknown Analyst]

Congratulations on the strong results. My first one is about the gross margins and the admin costs going forward, should we forecast slightly lower gross margins and somewhat higher admin costs given all the ramp-up costs coming up with the new -- especially nuclear contracts? And I mean the backlog increasing that much, too.

[Rishi Sharma, executive]

On gross margin, so if we exclude the onetime contract you saw that we're at about 28.5%. I think Q1, we had a relatively favorable mix. Q2, excluding that contract, solid mix. I think when you execute the beginning of the new contracts in nuclear, any new expanded our new program. We have some level of learning curve effect. But as those become very long term that the profit margins expand and follow the benefit we have on our capacity and our footprint is it's relatively fixed, so we can execute those contracts and we'll see a nice uptick on the absorption.

So that should help the gross margins. So I think we're comfortable with the ranges that we're at [indiscernible] growth. The admin cost, as we mentioned, the biggest driver is really commission. So as we continue to -- or commercial activity, and we see a significant increase in commercial activity, particularly in some of these new markets or green markets, I should say. It could stabilize. I think we've had some very good bookings that we referred to, and that's what's driving the record backlog. But plus or minus -- I wouldn't say a significant increase or significant work...

[Unknown Analyst]

Okay. This is helpful. And when you are talking about commissions and bookings, are the commissions paid like are they front-loaded like paid only at the beginning? Or are they paid as you deliver the products and the contracts.

[Rishi Sharma, executive]

Mostly as its delievered.

[Unknown Analyst]

Got it. And perhaps as you were discussing the cancellation, the $5.2 million, maybe it's too early in the morning for me, and I'm not being able to tie it back in the balance sheet or the financial statements, but -- it's included in the revenues, but not in the gross profit is my understanding. Does that also mean that it's excluded from your quarter's net profit? Or is it in there?

[Rishi Sharma, executive]

So the revenue is included. When we say -- when you say the gross profit is not included, I think I would rephrase maybe I'd just say that there's no gross profit. So essentially, what you have is revenue and the cost of sales that essentially is equivalent. And when you look at the balance sheet, basically, what we've done is taken a provision against the value of that inventory. So it kind of itself.

[Unknown Analyst]

I see. I see Okay. That's why -- so there's -- so the cost equates to $5.2 million as well. Got it. And as far as practicable to say, is it possible to add color or context about this cancellation? It's really good to see that you have strong protection clauses in your contracts, but it seems to be a significant amount.

[James Mannebach, executive]

Yes. This 1 here is a particularly unique circumstance. It goes back to 2017. It was the Russian EPC, the contract -- the initial contract was with the Russian EPC for deployment in Vietnam and a couple of things, of course, over time have conspired against dealing with the Russians as you're well aware. Yes, and so there was really in the past, the P&L impact is it had always been -- Rishi just described the change in accounting, but the cancellation of the contract was confirmed legally in the past quarter, and that's why we took the position we did on the income statement and the balance sheet.

So very unique circumstances here. It's not anything that's signaling some kind of a development other than sanctions outstanding, we're not scared of the Russians at the moment.

[Unknown Analyst]

That makes perfect sense given that additional color. So that $5.2 million is not in accounts receivable either. It's just been diminution provisions in inventory.

[Rishi Sharma, executive]

Yes, there was an advance against it. So that's exactly.

[Operator]

[Operator Instructions] there are no further questions at this time. I will now turn the call over to Jim for closing remarks.

[James Mannebach, executive]

Great. Thank you, operator. We appreciate your assistance. As always, it's good to meet with you and report the results. We'll look forward to the next quarter and meeting again. And then the interim for the Canadians on the phone. We hope you enjoy the holiday weekend. We were talking before we joined the call that we always seem to schedule our calls at the outset of holiday here in Canada.

So we'll take that into consideration going from as well, anyway, the best to everyone. And again, a real joy for us to be with you. Thanks so much. Bye for now.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.