Velan Inc

TSX:VLN

Earnings Call Transcript 2021-Q3

[Operator]

Greetings, and welcome to the Velan, Inc. Q3 Financial Results Conference Call. [Foreign Language] [Operator Instructions] [Foreign Language] As a reminder, the conference is being recorded Thursday, January 14, 2021. [Foreign Language] I would now like to turn the conference over to [Foreign Language] Yves Leduc, CEO. Please go ahead.

[Yves Jacques Leduc, CEO & Director]

[Foreign Language] Welcome, everybody, to our Third Quarter Fiscal Year 2021 Conference Call. I'm joined today by Rejean Ostiguy, our CFO; and John Ball, our Executive Vice President, Global Finance. This is Rejean's last quarterly call. As you read last week, he has decided to leave the company for reasons that are entirely personal that I will not comment on this call. The only thing I will say is that I'm very sorry to see Rejean go. He's been with us a little short of 18 months, but has accomplished a lot in the short period, contributing greatly to the V20 deployment, both in terms of ensuring we are on track financially as well as deploying the new financial systems as part of the modernization of the company, that important fifth lever of the V20 plan that I often allude to. Rejean is a team player and the operator teams regret his leaving as well. The good news is that John Ball soon to be interim CFO once Rejean leaves in a few days, is still with us. He's been our excellent CFO for over 15 years, and no one will be worried about our finance operations during the time we recruit Rejean's replacement. I'm very grateful to John for accepting to step back up again. So thank you, John, and thank you, Rejean, for what you've done, and above all, good luck and best of fortune in your new endeavors. 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. Before I start, let me mention that it has been a year like no other, where our employees celebrated Velan's 70th anniversary by rising to extraordinary challenges. We had to learn how to drive bookings, run manufacturing operations and carry out our transformation plan while coping with a devastating global pandemic. No book was never written on this, but the speedy and decisive deployment of safety protocols across all our global sites is nothing short of exemplary. This fiscal year is not over yet, with still important challenges ahead of us, but all things considered, there are several reasons to be impressed by our achievements to date, more on these during the conference call. So let's begin with our results. Net earnings and gross profit percentage. Net earnings amounted to $9.5 million or $0.44 per share compared to a net loss of $0.8 million or $0.04 per share last year. The increase in net earnings is primarily attributable to a $9.6 million gain recognized on the disposal of one of our Montreal plant, something I announced what happened at the last quarterly call. In Montreal, that disposal is a vital part of the North American manufacturing footprint optimization under V20. The production of a disposed plant has been transferred within our remaining North American plant as well as our Indian plant, something that we were able to do faster than the original program schedule had foreseen. Our results were also improved by the recording of $2.9 million of wage subsidies, which allowed us to avoid potentially significantly layoffs that otherwise could have been necessary to blunt the financial impact of the pandemic, and that was the goal of the federal program that we were able to benefit from. This increase was partially offset by $1.3 million unfavorable movement in income taxes. Our gross profit percentage for the quarter increased substantially from 25.0% to 30.7%, an improvement of 570 basis points compared to the prior year. The increase in the gross profit percentage, which made up for the lower sales volume was primarily attributable to the delivery of a product mix with a greater proportion of higher margin product sales and from margin improvements resulting from the overhead savings brought by our restructuring and transformation plan. The increase is also attributable to the reversal of the $1.6 million warranty provision due to a customer's withdrawal of this claim and the recording of $1.5 million of wage subsidies. Order bookings backlog and sales bookings increased by $70.4 million or 72.4% compared to last year's third quarter. Increase is primarily attributable to the recording of many breakthrough orders, one, thanks to our strong market position in geographies where the economy remained relatively healthy last year, namely in China and Southeast Asia. For example, our Italian operations achieved a record high of $48.9 million net new orders destined to the downstream oil and gas industry, while our French operations recorded $48.6 million of bookings for the quarter, primarily destined to the nuclear market. With respect to our Italian operations that are centered in the upstream and midstream oil markets, the bookings performance in the fall is all the more impressive that we -- when we remember that the oil price was below $0 in April. As additional comment, the increase in bookings in the quarter was achieved despite another soft quarter in terms of MRO orders recorded in our North American operations. As a result, our book-to-bill ratio was a strong 2.34, bookings thereby outpacing billings. That brought the company at the end of the period a backlog of $561.8 million. That's an increase of $155 million or 38.1% since the beginning of the current fiscal year. This is the highest we've disclosed since November 2012. Sales amounted to $71.6 million, a disappointing decrease of $17.1 million or 19.3% from the prior year. Sales were again negatively impacted by the reduction of nonproject orders recorded by North American operations due to the unfavorable market conditions triggered by the COVID-19 pandemic as well as the drop in the oil price, which affected our distribution channel. But shipments are also attributable to -- shipments decrease are also attributable to continued supply chain issues created by the COVID-19 pandemic as well as inefficiencies experienced in reconfiguring the Canadian plants under the V20 program that caused production delays. This decrease in sales was partially offset by increased shipments in our Italian operations, thanks to the delivery of previously delayed orders. Speaking now of our financial position. We continue to have a very healthy balance sheet, highlighted by a net cash balance of $73 million at the end of the quarter. This $42 million or 135.5% increase since the beginning of the fiscal year is attributable in part to the net proceeds obtained through the sale of our plant 2/7 in Montreal 6 months earlier than originally scheduled along with the new financing, we finalized over the course of the fiscal year and positive noncash working movement capitals, particularly in accounts receivable. The net cash per share at the end of the quarter was USD 3.38 or CAD 4.39. Our equity at the end of the quarter settled at $298.4 million or CAD 13.82 per share. Our equity per share was $17.92 as at November 30, 2020, compared to our TSX share price at the close of business day on that day of $6.06, indicating that our share price continues to be undervalued and that, of course, 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, extremely challenging environment. Here is how Velan has reacted, but as a reminder, 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, where we had to react very fast, probably earlier than most companies. 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 the lockdown in our Indian supply chain that has affected for a good part of the year the production flow in many of our plants. Velan was very quick in implementing sanitary measures, social distancing, health surveys, protocols, in case of outbreaks, et cetera, and so far, our record at maintaining as safe work environment as possible is something I'm very proud of. No plant closure as a result of infections contracted at work. While we're seeing how safeguards can be raised even further as we need to remain extremely vigilant now that we're deep into a second wave of resurgence of COVID-19 almost everywhere in the world. Now make no mistake, no matter how good we are in deploying safety protocols, no company escapes the impact of the pandemic. For example, quarantines happen as precautionary measures in cases where employees report having been in contact with infected people at home or outside work. So the question is how good one can be at constantly mitigating the impact of the crisis in one area where we have been particularly effective is managing our costs. We found ways to pursue the deployment of our V20 agenda with far reduced expenses and resources, and if you remember, even deployed a temporary salary reduction program for a few months. On that point, note that based on our strong bookings performance and our success in eliminating structural costs and improving margins under our V20 plan, we decided to restore the salaries on December 1. The business situation is very similar to what I reported at the last quarterly conference call. So the main headlines remain the same. Let me remind you of them by underlining the most recent developments occurring in the quarter against each of those highlights. Highlight #1, great progress in deploying the V20 plan, which we've accelerated with fewer resources and plans. So here -- a notable development here is that the results in the quarter were helped by the sale of plant 2/7 in Montreal, 6 months earlier than originally planned, and I add that we got a very good price for the sale. Second highlight, business health sprang forward this year as we're realizing the benefits of our V20 plan in a very impressive way. That's evidenced by a substantial reduction in production overhead and even more encouraging and the impressive increase in project manufacturing margins. As I said last year, to explain why we were seeing a reduction in project bookings, if you remember, which we anticipate it to be a temporary factor, we've actually become a lot more selective in project bidding, and our sales and quotation teams carefully apply a new pricing discipline, which is helping our margins. As a result of this more disciplined approach, you will see our margin fueled by a much better mix in our project manufacturing business. And it's now a trend as we're seeing margin getting -- the margins getting better every month. A reminder that the improvement of our margins of our North American operations was one of the key goals of V20, and I can confirm today that, that goal is being met. Highlight #3, a surge in bookings, Q3's performance is standing out as one of the best bookings quarters in Velan's recent history, owing in part, again, to our more focused approach to market that was put in place as part of our V20 strategy. In that regard, every single subsidiary has contributed to a truly remarkable year in bookings in North America, Europe or Asia. It's true that the global recession has hit our MRO business the hardest, deeply affecting our nonproject orders, but our 4 other strategic businesses are thriving, having grown our backlog by 40% to its highest level in over 8 years with many breakthrough orders, one, thanks to our strong market position in Europe, Middle East, India, Southeast Asia and China in the nuclear, petrochemical and oil production sectors. One element of V20 that remains to be successfully completed is the shift in our manufacturing model towards achieving linear and more agile operations in North America. That's an ongoing initiative, and we're not there yet. The shift requiring new processes and adaptive capabilities along with COVID-driven disruptions, the move of machinery, the accelerated closure of plant 2/7. All of this combined in causing production delays in our North American plants, and this is going to be a key area of focus in the months to come. To conclude, there is going to be a strong short-term focus in the next months as the uncertainty caused by indefinite global economic crisis persists, and as I just said, we need to address our production challenges. On the other hand, we are armed in North America -- on the other hand, we are armed with a near record backlog and growing margins. We have gained a lot of headroom and are now turning a lot more attention on our growth strategy. As I keep reminding our employees, we should aim to get out of the storm stronger than before it hit the world economy, and thanks to their unrelenting efforts, that goal is certainly within range. To all of them, I say, hats off. I'm proud of all of you as you all contributed to elevating an otherwise memorable 70th anniversary to an outstanding year on many fronts. Thank you. We're now ready for your questions.

[Operator]

[Operator Instructions] [Foreign Language] [Operator Instructions] The first question comes from Dean Trottier, a private investor.

[Dean Trottier]

It's pretty simple. Just looking for a little bit of an update on any additional working capital required to execute the backlog over the next 12 months? Or is kind of where we're at here from a working capital standpoint? What we should expect going forward?

[Yves Jacques Leduc, CEO & Director]

That's a good question. Rejean, why don't you take it?

[Rejean Ostiguy]

Yes. Dean, as you can see, the inventory increase since the last quarter. So this increase reflects the fact that we have a higher backlog. So we anticipate, again, a small increase in term of the inventory definitely be offset by a general accounts payable. Of course, the shipment in Q4 will be good. So we also forecast an increase in our account receivable. I hope this answered your question.

[Dean Trottier]

Yes. That's good.

[John D. Ball, Executive VP of Global Finance & Interim CFO]

The point I would add is that we did a refinancing that closed last summer, and it was written up in our Q2 results. That gave us extra capacity. We did it with both BMO and V20. So you have the extra borrowing capacity planned.

[Dean Trottier]

Okay. That's great. The only other question is, you had mentioned sort of the last bit of the V20 plan to focus on kind of the linear operation, maybe a quicker, more dynamic manufacturing. Are you expecting any significant restructuring charges related to that? Or have we kind of seen most of the restructuring charges?

[Yves Jacques Leduc, CEO & Director]

Most restructuring charges have been incurred already, and now we're staffed to handle the backlog that grew last year. So there might be minor tweaks to what I just said, but overall, the work is behind us in terms of restructuring charges.

[Dean Trottier]

Okay. And congratulations to the team for the sale of the Montreal plant and executing the V20 plan in what's been a pretty chaotic year. So congrats to you guys.

[Yves Jacques Leduc, CEO & Director]

That's an understatement, and I really appreciate your comment.

[Operator]

[Foreign Language] [Operator Instructions] We've show no further questions at this time.

[Yves Jacques Leduc, CEO & Director]

Okay. Then I -- the one last thing I want to say is that the company is evolving, and we were blessed to have hired a new leader of the global operations and supply chain, Paul Lee, who started in the second week of the fourth quarter, so we're well going into the fourth quarter and anticipating a very busy fiscal '22. I look forward to our report in May for the Q1 -- Q4 results of fiscal '21. I want to thank you for your attention this morning. [Foreign Language]

[Operator]

This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you, and have a good day.