Velan Inc

TSX:VLN

Earnings Call Transcript 2022-Q3

[Bruno Carbonaro]

Good morning. Bruno Carbonaro speaking. I'm the CEO of Velan since December 1. I'm accompanied with Benoit Alain...

[Benoit Alain, Chief Financial Officer]

Bruno? Bruno? Bruno? [Foreign Language]

[Bruno Carbonaro]

Okay.

[Operator]

[Foreign Language] Greetings and welcome to the Velan Inc. Q3 Financial Results Conference Call. [Foreign Language] [Operator Instructions] [Foreign Language] As a reminder, this conference is being recorded today Thursday, January 13, 2022. [Foreign Language]I would now like to turn the conference over to Bruno Carbonaro, Chief Executive Officer and President. [Foreign Language]. Please go ahead.

[Bruno Carbonaro]

Good morning. Bruno Carbonaro speaking. I'm the CEO of Velan since December 1, 2021, when I succeeded Yves Leduc. I'm in this conference with Benoit Alain, the CFO of Velan.Just to give you a little bit of my background, I joined the company in November 2019 in the capacity of President of the East. And as you may have noticed with my accent, I'm French.We've slightly changed the format of this call, and we'll use the support of a brief presentation to present our results for Q3, and this presentation will be available in French and in English on our website.Let's move on to the first slide, which shows our just principal markets. And you see that we are active in different markets: the Navy business, especially in the U.S.; the nuclear business, especially in Europe, but also in Asia and in North America; severe service application with a lot of ball valves for several applications in the refineries and in the mining business; the oil and gas, which is both upstream, where we report in the oil and gas and projects where we have refineries and petrochemical; and the MRO and aftermarket business, which is mainly based in North America, but has also some connections in Asia and Europe.Let's move on to the next slide, where I want us to have the opportunity to present our new Board of Directors. We have now 10 person on the Board, and we have 3 new members that joined us in 2021: Suzanne Blanchet, Robert Raich and Edward Kernaghan. And Suzanne is the new Chair of the Audit Committee of the company. So remember that you see that it's a blend of member of the family and senior executive with a lot of experience as directors.Now let's move on to the results and highlights of the quarter. And as you see, we try just to show there is more than speaking to them. Basically, you see that the sales for Q3 reached $110 million, which is a second order in a row above $100 million. And basically, it's one among the best quarter in the past 5 years.On the EBITDA front, we report an EBITDA of $13.3 million, which is comparable in amount to last year. But you will see in the subsequent slide that it's completely reached in a different manner, which is -- which speaks to our results in terms of proportional results. The net income is positive at $4.5 million, and that's the second time in a row that we have a profitable quarter.Just to have a look at -- it's extremely important that we have a look at our backlog. We had the backlog of $543 million. We still have a very high backlog. And the book-to-bill ratio from the beginning of the year, so from the first year -- from the first day of the year until the end of the third quarter, is 1. And basically, the decrease of the backlog, which is a slight decrease by around $20 million, is mainly due to the appreciation of the dollar versus the euro and extremely strong billings in the 2 last quarters.In terms of cash, as you see, there is a slight decrease of our net cash. But basically, we use the cash generated by our operations to pay down our revolving credit facility by $11.9 million.Can we move to the next slide, please? Okay. I want to explain in details our EBITDA. And as you see to the left of the slide, it's one of the best EBITDA in the recent time. It's around equivalent to the EBITDA of the third quarter last year. But last year, if you remember, most of the EBITDA came from restructuring and transformation income. Basically, we sold out the former plant 2 in Montreal, and the proceeds of the sale were incorporated somehow in the EBITDA.So if you go to the right of the slide, now we readjust the EBITDA of last year from $13.8 million to $5.7 million, which is really comparable to the $13.3 million we report this year. Basically, if we want now to break up the different variances, the first is the volume -- the mere volume of sales with a $13.5 million increase and a good mix. The margin mix has improved also. And then there is a fixed foreign exchange benefit of $1.8 million. That's the positive side of it.On the negative side of it, you have an increase of the admin costs, including the sales commissions that were higher because the volumes of the sale was also higher; and then a decrease of the federal subsidies that's used, and you have all the details in the press release between the use in the admin cost and its use in our direct labor costs. And then the other is 0.6. So basically, a strong increase from $5.7 million adjusted EBITDA to $13.3 million. So that's a very strong third quarter in terms of EBITDA.If we move on to the next slide, then you see on the slide how we use the cash generation -- generated by the EBITDA. So basically, if we start just to the right of the slide, I think $13.3 million of EBITDA translates in the free cash flow of $6.2 million. That's a ratio about 45%, which is a fair ratio. It could have been better, but it's not a bad ratio. And -- but you see that the main focus we have is on working cap, and we managed to reduce our account receivables by $11.7 million and our inventories by 4.7% -- $4.7 million, sorry. Basically, it shows you that we have a strong focus and a strong discipline in our working cap, and we will continue to do so in the future quarters.On the negative side, we have a reduction of account payables linked to the purchasing cycles. We have a reduction of the customer deposits basically because we've -- it's really a timing issue for projects, and the rest is less important. So basically, we generated $6.2 million of free cash flow out of an EBITDA of $13.3 million. And now you see how we use that basically on the left, where you see that basically, we generated $6.2 million of free cash flow. We had also a gain on disposal of properties and plants and mainly due to operations in Korea. And then using that, we decreased our debt by repaying our revolving facility by $11.9 million. And then the rest, you can see. So a strong discipline in the cash management on the top of having an EBITDA, which is a nice EBITDA for the quarter.Let's move on to the next slide. Yes, I want to focus on the backlog. Basically, that's the only metric we comment with the investors when it pertains to future operation. It's extremely important in the project business to have a sense of your backlog, total backlog, and more importantly, the share of your backlog that you can ship in the next 12 months. So that's something that we report generally.And here, you see that the total backlog is a slight decrease at $543 million, and $350 million is shippable in the next 12 months. And basically, it's stable. It has been stable in the last 18 months. And basically, the book-to-bill ratio of 1 million. If I'm completely honest, the performance in terms of bookings of the Q3 was fair, but not extremely good. And we see some dynamics on the market in the various regions, be it North America, India and China that could lead to increased backlog and booking in the next quarters.Let's move on to the next slide. I'd like to highlight some of the markets where we are pretty active. And most probably some of you know, if you follow us for a long time, that coker -- the coker business, which is reported under the severe service segment, is one of our sweet spots. And I'd like to give you a couple of details around the typical projects that we gain. And that's a project that we got at the end of the quarter, so most of this will be reported in Q4 technically. But it's a $4.2 million project for a refinery in Egypt. And basically, it's through European EPC, that's Technip.And basically, in terms of number of valves, it's extremely important because it shows you exactly the type of projects we are pursuing. It's around 70 to 75 different valves but in 4 different categories. You have gate valves and ball valves, and you have switch valves that are very specific. And basically, by just assembling a bundle of technologies, we were able just to offer and match offer to the EPC at a reasonable price that allowed us to get this business. And basically, all this type of business for 2 million, basically, we will have people working on it, not only in North America, especially the engineering office, but also in Europe because most of the sites -- most of the valves will be manufactured either in Portugal or in Italy because, basically, it was extremely important for the customer to have them manufactured in Italy because they had access to a financing, which was of Italian origin, if we were just able to show that we were manufacturing in Italy. So that's the type of value that we as an international group with operations in different geographies can assemble for the benefit of our customers.And I suspect that we can go to the next slide, just to show our face. Bruno Carbonaro, that's me; and Benoit with me, and we will be more than happy to answer any questions you may have.Let's open the floor to any questions.

[Operator]

[Foreign Language] [Operator Instructions] And Mr. Carbonaro, we seem to have no questions queued up on the phones at this time.

[Bruno Carbonaro]

Okay. Let's wait an additional 2 or 3 minutes, and then we can adjourn, I suspect.

[Operator]

[Foreign Language] [Operator Instructions] And Mr. Carbonaro, we have no questions queued up on the phones.

[Bruno Carbonaro]

Okay. So I suspect that it's time for me to conclude. Thanks a lot for the interest in Velan, and I'm more than happy to answer any of the questions you may have after the conference or you can direct also your questions to Benoit that you see is in the address. So don't hesitate to call us if you have any private questions you may want to have. Thanks a lot.

[Operator]

[Foreign Language] Thank you all. That does conclude the conference call for today. We thank you for your participation and ask you to disconnect your lines. Have a good day, everyone.