Velan Inc

TSX:VLN

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Velan Inc. Q4 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, May 24, 2018.I will now turn the conference over to Yves Leduc, President and CEO of Velan Inc. Please go ahead.

[Yves Jacques Leduc, President, CEO & Director]

Good afternoon, everybody, and welcome to our Fourth Quarter Fiscal Year 2018 Conference Call. I'm joined today by John Ball, our CFO, and I'll 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.Fiscal year 2018 was my first year as CEO and was, by far, the most challenging since I joined the company 3 years ago. Our results are deeply disappointing as we suffered a loss on slightly increasing revenues. The poor bookings experienced by North American operations in fiscal 2017 was not followed with the expected recovery this year. The usual strong performance of our French operations, coupled with Italy's impressive sales recovery, could not offset our performance in North America. Meanwhile, the complexity of our project manufacturing business keeps increasing at a pace faster than our improvements. This, combined with sharply contracting margins in project valves, contributed to a notable margin decline, again, mostly in our North American operations.Now a closer look at our results. First starting with net earnings, or loss, I should say. The loss for the quarter amounted to $8.2 million or $0.38 per share compared to net earnings of $3.7 million or $0.17 a share last year. EBITDA amounted to a negative balance of $1.2 million or $0.05 per share compared to a positive balance of $12.6 million or $0.58 per share last year. The decrease in our earnings is primarily attributable to significantly weaker margins, increased administration costs and the negative effects of the U.S. tax reform legislation passed during the current quarter, which resulted in a onetime tax expense inclusion of $4.3 million.Our gross profit percentage decreased from 28.1% to 16.9% for the quarter. Despite the fact that sales remained relatively stable and that we maintained control over our labor and overhead cost, the gross profit percentage decreased significantly due primarily to shipping a product mix with a greater proportion of projects with lower margins, I'll say a few words about that in a minute; a decrease in production, which reduced the amount of current period direct labor and production overhead cost that could be capitalized as more of a one-off effect; and warranty provisions. In addition, shipping delays due to customer-related and internal operational issues resulted in an increase in provisions for inventory aging, which had a direct negative impact on our margins.Now the main factor that's affecting our results is more of a competitive one or a market-driven one, and it's sad that the lingering pricing pressure and our inherent fixed overhead cost due to our large global manufacturing footprint continue to have a negative impact on our gross profit percentage, particularly in North America, where we saw a 320 basis point increase in our material cost as a percentage of sales in the quarter, largely driven by price pressure. Let's talk about sales, order bookings and backlog. Sales remained relatively stable for the quarter, decreasing by $0.2 million or 0.2% from the prior year. While sales were lower in the current quarter when compared to the comparative period in the prior year, they were stronger when compared to the previous 3 quarters of the current fiscal year. Sales for the quarter were improved in our Italian subsidiary, while our North American operations realized, as I said, the best quarter of the year, but yet lower than the prior year due to delays in shipments of certain large project orders caused by various customer-related and supply chain issues.Bookings decreased by $53 million or 42% for the quarter. Now the reason for that is that it compares to the bookings that we -- were successfully won a year before in the French operations, namely $55 million in large project orders in the prior year comparable quarter to supply valves towards the construction of a nuclear power plant in the U.K. While bookings remained relatively flat, if these orders are not taken into account, our North American operations continue to struggle as the current highly competitive environment in many of our markets continue to put downward pressure on pricing and lead times in project manufacturing. While the non-project side of our business, namely the replacement valve business, is actually showing signs of improvement. Despite the fact that sales outpaced bookings in the year, we ended the year with a backlog of $464.5 million, an increase of $26.3 million or 6% since the beginning of the current fiscal year. Financial position. Overall, while our financial performance for this fiscal year has been difficult, we continue to have a strong balance sheet. Net cash settled at $61.1 million at the end of the quarter, a decrease of $12.2 million or 16.7% since the beginning of the quarter. This decrease is primarily attributable to cash used in operations, but also mainly from investments in property, plant and equipment, long-term debt repayments as well as distributions to shareholders via dividends. The net cash per share was USD 2.83 or CAD 3.62. Our equity at the end of the quarter settled at $321.6 million or USD 14.87 per share. In Canadian dollar, our equity per share was $19.05 at February 28, 2018, compared to our TSX share price at the close of business day on that day of CAD 17.55, indicating that our share price continues to be undervalued. While our financial position remains strong, we have decided to cut our quarterly dividend to $0.03 per share beginning in June 2018 in order to use these cash savings to invest in the continued transformation of our business.So that's the end of the results overview. What I want to do now is tell you a bit about our outlook and what we intend to do going forward.Our strategic plan, Velocity 2020, launched last fiscal year, rests on a few key building blocks and aims at delivering the consistent returns that would be expected of a high-performing company. We're far from that goal, as you can see, but our business results overshadow the fact that we're making progress on many fronts in transforming our company.For example, we're on track to deliver the 3-year commitment that I made last July to reduce our cost base by a cumulative $20 million over 3 years. To date, we've identified $5.2 million of cost savings under this initiatives -- I should say realized. We've achieved material savings through shifting sourcing to low-cost countries and tightening up our procurement practices. We're only at the beginning of reaping the benefits of a new corporate function established at the end of fiscal 2017 and expect material efficiencies to ramp up this year. The fact is, however, that these savings are for now, in a large part, being transferred to our customers because of a severe price competition currently affecting our current project business.Another example is the deployment of our new Valve Project Management process, which is reaping visible benefits in terms of lead time reduction. It was kicked off in fiscal 2017. It's gaining traction. We're actually scaling it up. But as project manufacturing becomes increasingly complex and promised lead times increasingly shorter, we're not yet at a point where a victory can be claimed.Thirdly, the number of successfully closed breakthrough initiatives in our manufacturing operations has increased steadily. This is not something we were doing as a matter of custom, and we're very happy with the momentum we're seeing in the operations and really signaling a step forward in building a culture of continuous improvement, which was not present until recently.We've successfully restructured our global sales force along vertical rather than geographic market lines in order to focus resources on higher-margin segments where fewer competitors can match our product capabilities and potential to meet the toughest application requirements. Just wait up a couple of minutes, I'll tell you a bit more of how that is going in the context that we're deploying those changes in. This move is accompanied by a greater emphasis on a disciplined commercialization of our innovations, and as such, last year saw a number of new designs and product platforms introduced a very rigorous way into the market.Another example of progress is our greater focus on the installed base is paying off as spare parts' billings and percentage of sales reached a record level a second year in a row in our North American operations. In France, we've seen service revenues grow also to record levels, a reflection of the exceptional aftermarket organization built up to service the installed base and delivering satisfaction to our nuclear customers. This is a business model we intend to expand, and we've actually started to expand it to our North American operations as we increase synergies and cooperation across our global organization. Most of our subs are doing well, with our French operations performing extremely well in the nuclear business. And as I said, our Italian operations hasn't turned their business around after a very difficult fiscal year 2017.Now unfortunately, the combined effect of these successes is not showing in the bottom line. Why? I have to admit, we underestimated the impact of a shifting business environment on our ability to drive quickly enough the business transformation foreseen under our strategic plan. Last year, in my annual message to the shareholders, I stated that, and I quote, "Because the company is financially healthy, we are careful not to rush, recognizing the multi-fronted change challenge we're facing.” Now this year, I'm saying, in reaction to the business performance, but with our financial health still strong, we have become far less patient. The good news is that the progresses made in fiscal year 2018 on the many fronts described above prepare us to move faster. The other good news is that employees tell me they're not accepting the results and are eager to contribute to the company's return to financial success. Just recently, we agreed with the Québec unions to postpone by a year the renegotiation of our labor agreement. And that's as the result of everybody recognizing that we had to focus in one common goal, namely bring back the company on track. In short -- and that's an example of the winning attitude I just referred to. In order -- in short, the rapidly changing business environment and the slow recovery in bookings for North American operations require that we accelerate our transformation. Given the disappointing results, we are currently reassessing our Velocity 2020 strategic plan to determine how it can be adapted to include ways to simplify our business and rapidly broaden our cost reduction initiatives. Simply put, we'll need to make important changes if we want to turn around our performance and significantly improve our operating results.Other companies have undergone tough tests, and I see no reason why we should not be able to meet the challenge we're being faced with. I told Tom Velan that I believe, even more than when I joined, that the company has what it takes to grow profitably in the valve world, where we got one of the most reputed brand names in the industry, customers who root for us, incredibly knowledgeable and passionate employees, a global supply chain that is well-established in Western as well as low-cost economies and a strong balance sheet. And this is all, I think, we need to have strong confidence in our ability to rebound. Today, we realize that more is needed to haul the company out of its current position, and we will respond. As far as our long-term perspective goes, the goal line may have moved away from us, but we're not losing sight of it. Stay tuned.So this is the end of my comments. I'll now turn it over to our moderator. And we're ready to answer any questions that you may have.

[Operator]

[Operator Instructions] There are no questions at this time.

[Yves Jacques Leduc, President, CEO & Director]

Okay. Well, thank you very much, everybody, for your attention. As I said, stay tuned, and have a good afternoon.

[Operator]

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.