Velan Inc

TSX:VLN

Earnings Call Transcript 2020-Q3

[Operator]

Greetings, and welcome to the Velan Inc. Q3 Financial Results Conference call. [Operator Instructions] As a reminder, this conference is being recorded today, Friday, January 10, 2020.I would now like to turn the conference over to Mr. Yves Leduc, CEO of Velan Inc. Please go ahead.

[Yves Jacques Leduc, CEO & Director]

Good morning, everybody. Welcome to our third quarter fiscal year 2020 conference call. I'm joined today by John Ball, our CFO. I will start with a brief summary of our results, followed by a more detailed discussion of our outlook, we'll then open the line to your questions. I'd like to start by mentioning I'm very pleased with the progress we made this quarter in carrying out our V20 strategy, and we're solidly on track with our planned schedule. I will talk about this after I complete my financial review and provide you with a detailed progress report.Now regarding the V20 plan and our investment in carrying it out, you will notice that we introduced 2 new non-IFRS measures this quarter in operating profit or loss before restructuring and transformation cost as well as adjusted EBITDA. Both of these measures of performance add back restructuring and transformation costs that are related to the V20 transformation, which include temporary project resources and their travel and lodging cost as well as the moving cost related to dismantling and transportation of machinery and equipment to reflect the optimized manufacturing footprint plan. We believe that our new measures of performance will provide a greater understanding of our financial information and our results to our readers.Net earnings or loss, we presented a net loss of $0.8 million or $0.04 per share, $0.04 per share this quarter compared to a net loss of $200,000 or $0.01 per share last year. Net loss for the current quarter was of course impacted by the $1.4 million spent on our restructuring and transformative initiative, V20. Excluding this amount of $1.4 million as well as the after-tax impact of these restructuring and transformation costs incurred during the quarter, we would have presented net earnings of $0.2 million or $200,000, representing an improvement of $400,000 over last year.Our operating profit before restructuring and administration cost amounted to $1 million compared to $0.2 million last year. Adjusted EBITDA amounted to $4.3 million or $0.20 per share compared to $3.4 million or $0.16 per share last year. The increase in operating profit before restructuring and administrative costs and adjusted EBITDA is mainly attributable to lower administration cost and an improved gross profit percentage, the whole being partially offset by a lower sales volume.Our gross profit percentage increased by 50 basis points from 24.5% to 25.0%. The increase in gross profit percentage versus the last year is mainly attributable to a stronger proportion of higher-margin product sales and an increased sales volume in our Italian operations, which allowed the subsidiary to cover its fixed cost more efficiently. This increase was partially offset by temporary factors such as the less efficient product mix in our North American operations, including a lower volume of higher-margin spare part sales.Nevertheless, the gross profit percentage of our North American operations improved this quarter compared to the first and second quarters of the current fiscal year, thanks to the improved margins in our project manufacturing business. As a reminder, this quarter's gross margin of 25% is an increase of over 6 points when compared to our Q1 performance of 18.7%.Sales order, sales order bookings and backlog. Sales decreased by $3.6 million or 3.9% for the quarter. The decrease for the quarter was primarily attributable to the shipment of a large complex Chinese order by North American operations in the third quarter of the prior fiscal year, partially offset by increased shipments of large project orders in the company's Italian operations.Bookings decreased by $3.6 million or 3.6% for the quarter. This decrease is primarily attributable to lower order bookings by the company's Italian operations, which booked a record of large project orders in the prior year. This decrease was partially offset by higher order bookings in the company's Indian operations. I've mentioned last quarter that to understand the bookings reduction context, it was important to understand that our project quotation activity 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. The shift is the result of deliberate screening that is expected to take gradually effect as we replace our existing backlog with higher margin orders. It's also important to note that the gap in terms of bookings shortfall compared to last year was significantly reduced this quarter compared to the 2 prior quarters.Our book-to-bill ratio for the current fiscal year was an almost even 0.98. As a result of billings slightly outpacing bookings, we ended the period with a backlog of $432.1 million, a decrease of $17.6 million or 3.9% since the beginning of the current fiscal year. 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.Financial position. A summary of this, net cash settled at $39 million, a decrease of $1.9 million or 4.6% since the beginning of the fiscal year. This decrease occurred mainly in the first half of the year since net cash increased by $4.1 million or 11.7% during the course of the quarter. The net cash per share was USD 1.81 or CAD 2 -- CAD 2.40. Our equity at the end of the quarter settled at $297.4 million or USD 13.76 per share. In Canadian dollars, our equity per share was $18.29 at November 30, 2019, compared to our TSX share price at the close of the November 30, 2019 business day of $6.93, indicating that our share price continues to be undervalued.Now I'm going to turn to a review of our strategic plan progress. I want to note that today is the first anniversary of the milestone announcement of our V20 plan, and I want to take a few minutes to take you through what has been happening since the announcement. As we've been reporting in our past conference calls, the main reason why our company stock is currently significantly undervalued is that the stock price was dragged by North American operations performance while foreign subs alone are doing very well. And this is the main focus of the V20 plan, a direct response to a deteriorating business performance of our North American operations that require drastic action on multiple fronts. The plan, which was approved unanimously by our Board of Directors one year ago today, consists in a comprehensive program of investments and initiatives aiming to significantly reduce structural cost, eliminate excess manufacturing capacity and complexity, reduce cycle times and generate sustained improvements in margin and EBITDA year-over-year. It consists of 5 pillars, which I want to cover right now while providing a progress update on each.The first pillar we've actually established a few -- a couple of months before the V20 announcement last year is that we aim to drive growth and greater customer intimacy through 5 integrated and focused businesses, 3 of them -- 2 of them already existing and the others, the 3 others, the result of reorganizing our North American operations. So the 3 that resulted from the reorganization of our North American operations are the MRO and aftermarket business, which brought together spares and replacement valves focusing on the underpenetrated global installed base. The second business unit was severe service to which we added navy, preparing for a substantial near-term booking growth resulting from investing in our front-line capabilities. The project manufacturing business, which is the most competitive area we are in, which will benefit from a more focused and leaner supply chain and footprint essentially resting on our Granby plant and our Indian plant for simpler project valves, and the 2 already existing businesses are basically our 2 European-based businesses upstream -- midstream oil and gas, that's our Italian subsidiary and our French business, where our excellent team over the years have achieved an impressive leadership in the global nuclear industry.So the 2 European subs are performing very well, strong and profitable nuclear business in France, and again, emphasizing spectacular -- the spectacular rebound of our Italian operations that are now shining with a record backlog and impressive profitability.If I look at the 3 newly created business -- businesses units, MRO and aftermarket is driving action plans focused on leveraging our huge global installed base of valves. Severe service, where we have significant growth opportunities is leveraging our technology by targeting specific applications in refining and building on the recent success of winning mining orders for the first time in many years. The project manufacturing business, which is acting in highly competitive segments, there, we're seeing improvements in margins, and thanks to careful -- carefully selecting and carefully qualifying our bidding opportunities.Overall, we're achieving what we intended with the business units, which still much to do, and that is -- with still much to do, we're seeing much better teamwork in integrated market and customer plans.The second pillar of V20 is to reorganize to consolidate our 4 North American manufacturing plants into 3, specializing them and connecting them to the strategic business units. So here, what I have to say to report is that during the quarter, we were able to extend 3 labor agreements in Montreal, Granby and Williston, following tough negotiations. As a result, we're accelerating the consolidation and specialization of our North American plants with the cooperation of all employees. I'll say a few words about this in a minute.Despite the delay in reaching the agreement, an agreement with the Montreal unions, we're solidly on track with our planned schedule to closing plant 2/7 in Montreal, converting the 3 other plants.The third pillar is to maximize global supply chain by shifting to a leaner, less vertically integrated manufacturing model, centered on strategic machining and assembly and testing. My report here is that in the last months, we've been conducting a multitude of workshops involving both unionized employees and production supervisors. I actually attended one yesterday, along with some board members and shareholders, and we're all impressed with the progress in defining actions and improvements, bringing to life a lean manufacturing model that will substantially reduce production cycle times. Meanwhile, our efforts in developing low-cost suppliers and readying them to take additional machining business are also progressing well. This is a significant economic driver of our V20 plan as the reduction in in-house machining here in North America will allow a substantial reduction in production overhead and this, combined with the fact that we'll be able to outsource machining at significantly lower hourly cost, will have a very positive effect on our margins.As a reminder, V20 is not only about reducing structural cost through plant consolidation, it involves the launch of a new manufacturing system. And I'm proud to see the engagement of our employees in proposing solutions to group tasks, reduce setup time, eliminate process steps, et cetera. In short, they're buying into it.The fourth pillar of V20 is to transfer nonproject valve production to our state-of-the-art low-cost Indian facility. There was still a substantial amount of valves -- nonproject valves produced in North America, where we were not making money at all, in fact, losing quite a lot of money in a very competitive replacement valve market.On this, I have to say that our Indian plant is gradually expanding its production of nonproject valves currently being transferred from Canada. We have expats either based there or traveling to and fro, working in pass teams to set the plant up. Production transfers of our nonproject business have been happening for a few months already, and here as well, we're tracking to schedule.The fifth pillar of our V20 strategy is to accelerate investments in modernizing systems and processes, improving agility and customer response through automated project management and pricing. Systems deployment has picked up in pace with the launch this year of many ERP-related tools and programs that are having a direct positive impact on the way we run the business whether it be, for example, with regards to capacity planning, pricing, with our new CPQ tool and of course VPM. With regards to VPM, you've heard me talk for a couple of years on the investment in improving our delivery performance. We're now fully deployed, and we're seeing remarkable results with radical improvements in our delivery performance, increasingly noted and observed and felt by our customers. Our investment in VPM is looking more and more like a highly distinctive asset that we have barely started to exploit yet, it will make [ Technical Difficulty ] in both our business and market performance.To conclude, as you can see, we've been extremely active this year in transforming the company. There is progress on many fronts, and the task in the next 15 months will be to bring all the key elements together to accelerate the company's return to profitable growth, remembering that the most significant impact of the company's restructuring and transformative V20 initiatives is only expected late next fiscal year when the task of reorganizing and reducing the company's North American footprint will be completed. Very proud of the achievements of all of our employees. This year was a difficult year, particularly with regards to the discussions and negotiations that brought a very acceptable, agreeable and successful resolution of the situation during the last quarter. And we're progressing fast, and I'm motivated by the extreme energy and enthusiasm of all -- of our employees that are working together in turning around our North American operations business performance.So that completes my overview for today. John and I are now ready for questions.

[Operator]

[Operator Instructions] Mr. Leduc, Mr. Ball, there seems to be no questions on the phone lines at this time. So I'll turn the call back to you.

[Yves Jacques Leduc, CEO & Director]

I guess my presentation was exhaustive and comprehensive. So I look forward to keeping in touch with all of you. And meanwhile, thank you for attending today's conference call. And by the way, I may have -- should have started with this, I'm wishing all of you a happy and healthy new year. Thank you very much.

[Operator]

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