Velan Inc

TSX:VLN

Earnings Call Transcript 2019-Q4

[Operator]

Greetings and welcome to the Velan Inc. Fourth Quarter Financial Results Conference Call.[Operator Instructions] As a reminder, this conference is being recorded Friday, May 17, 2019.I would now like to turn the conference over to Yves Leduc, President and CEO. Please go ahead.

[Yves Jacques Leduc, President, CEO & Director]

Thank you. Good morning, everyone. It's a pleasure for me to provide you with a report of our Q4 results.I'm here with John Ball, our Chief Financial Officer.The highlights of fiscal year 2019 could be stated from 2 different perspectives. First, the company's financial performance has improved versus the previous year's disappointing results, thanks in large part to our North American sales and operations recovering performance in sales and margins. Meanwhile, France's steady performance of the last few years continues. And we're very pleased that Italy confirmed its fiscal year 2018 rebound with a second strong year in a row and most notably built up a record backlog which will in turn convert into record sales for them in fiscal year 2020. We also want to point out Korea's rapid ramp-up in its manufacturing capacity, without which North America would not have been able to fully capitalize on the surge of orders resulting from its improved MRO business.I mentioned 2 perspectives. The second perspective is to consider fiscal year 2019 an important milestone in the company's history. I stated last year in reaction to the disappointing results, and I quote, "We will need to make important changes to improve our operating results." So this year culminated with the Board unanimously approving our ambitious plan to transform the company after an in-depth strategic diagnosis. The strategy can be summed up. We reorganized into business units to better serve our customers. We're tightly connecting those business units through our manufacturing and supply chain, and we're reducing costs through plant consolidation in North America and better leveraging of our state-of-the-art facility in India. Before I lift the veil on the most important aspects of our transformation, let's have a look at our results, first, for the quarter; and then the year in summary.Net earnings. Net earnings for the quarter amounted to $1.5 million or $0.07 per share compared to a net loss of $8.2 million or $0.38 per share last year. EBITDA amounted to $3.8 million or $0.18 per share compared to a negative $1.2 million or $0.05 per share last year. The increase in our earnings is primarily attributable to a higher sales volume combined with better margins and the negative effects of the U.S. tax reform legislation passed in the last quarter of the previous fiscal year, which had resulted in a onetime tax expense inclusion of $4.3 million. This is the first quarter since mid-year 2018 that delivers positive net earnings, so a good sign.Our gross profit percentage increased 7 points from 17.6% to 24.6% for the quarter. The increase was due to higher sales volume; and was also obtained, thanks to the lower production costs during the course of the quarter.Let's talk about sales, order bookings and backlog for the quarter. Sales increased by $2.7 million or 2.6% from the prior year. The sales volume for the quarter is the highest of any quarter of the past 2 fiscal years. Sales for the quarter were improved in our Italian, Korean and Indian subsidiaries, while our North American operations realized lower sales for the quarter.Bookings increased $9.1 million or 12.5% for the quarter. Bookings in the quarter were negatively impacted by the cancellation of a $36.3 million large project order booked in a prior fiscal year to supply valves to the power market in Vietnam. The cancellation resulted from sanctions imposed on Russia, and the Velan contract was through a Russian engineering firm. If the effect of this order cancellation is removed, bookings would have increased by $45.4 million or 62.3% in the quarter. This increase in bookings was due primarily to higher orders booked by our Italian and French subsidiaries, and I'll be saying a few words about this in a second.Let's talk about the full year's perspective now. Sales increased by $28.9 million or 8.6% from the prior year. Sales were positively impacted by an increase in shipments from the company's North American, Korean and Indian subsidiaries. Thanks in part to improving conditions in the refinery market, the company was able to increase its North American MRO sales as well as improve its shipments related to large project orders. More importantly, the surge was fueled by a series of tactical moves that have strengthened our strategic position in the distribution of replacement valves. In addition to revising our pricing strategy, we've appointed AIV as a new master distributor. It is one of the largest in the world after its acquisition of Zenith which had been a master distributor exclusive to us since the 1980s.Bookings. They increased by $51.5 million or 16% from the prior year. Other than our successful MRO efforts, the increase in bookings was due primarily to higher orders booked in Italy and France, notably approximately $66 million in project orders won by the company's Italian operations to supply high-pressure valves to a major FPSO project, FPSO or floating production storage and offloading platforms in the sea, the result of our Italian team successfully targeting a very attractive segment in the oil exploration sector. Also very proud to mention this: The company's French operations won a $25 million order for the ITER organization, a strategic research collaboration among 35 countries located in France and mandated to build and operate a device that will generate power out of nuclear fusion. Very proud that Velan has been chosen as key supplier of valves for this prestigious project. You may have noticed the press release we issued yesterday about all of these orders.Once again, this fiscal year bookings have outpaced sales. Despite this positive ratio, the total backlog decreased by $14.8 million or 3.2% since the beginning of the fiscal year, settling at $450 million. Despite a year of stronger bookings, our backlog has decreased slightly due mainly to the cancellation late in the year of that large project order to supply valves to a power plant in Vietnam that I mentioned earlier.Now let's talk about our results. Net loss amounted to $4.9 million or $0.23 per share. That's an improvement of $12.9 million over last year. EBITDA amounted to $7.1 million. That's an improvement of $11.5 million over last year. So our financial performance is essentially the consequence of improving our business performance. Gross profit increased by $14.7 million for the fiscal year, while the gross profit percentage increased by 230 basis points to 23.3%. The increase for the year was due primarily to higher sales volume achieved by the company's North American, Korean and Indian operations, combined with the shipment of a product mix with a greater proportion of projects with higher margins in France. As explained above, our North American operations were able to revitalize our MRO business while continuing to search for margin improvements in our project business. The growth was, however, not enough to fully cover our current costs, mainly in our North American operations. This is one of the factors that drove management to propose a plan to reorganize the North American operations and rethink our business model.To conclude our financial position. With respect to balance sheet, net cash settled at $40.9 million at the end of the quarter, a decrease of $23.6 million or 36.6% since the beginning of the quarter. The net cash per share was USD 1.89 or CAD 2.49. Our equity at the end of the quarter settled at $309 million or USD 14.28 per share. In Canadian dollars, our equity per share was CAD 18.80 at February 28, 2019, compared to our TSX share price at the close of business on that day of CAD 9.22, indicating that our share price continues to be undervalued.So that's the end of the financial part of my address. What I want to do now is try to bring all the pieces together to capture Velan's strategic story, which aims at capturing our full potential. So there's a lot happening right now. What I'm trying to do is to describe the thread and the unifying thinking that has us drive a strategy that you heard about in the last few months. With the measures that were approved last January, what we're aiming to do is to attack the few key structural factors that hinder the company's competitiveness and prevent it from fully leveraging its core capabilities and brand advantage. Consequently, as a result of that, we're not -- we have not been able to grow profitably in an industry that has shifted in the last decade. So how are we going to change all that?Before I go into the details, I want to make something clear. The measures that we announced do not constitute a new strategic direction for Velan. They continue in a direction set more than 2 years ago. Considering the investments already made under Velocity 2020 in organizational development, operations improvement and new systems, Velan is now well into a major transformation. We're adapting our business model and constantly acquiring new key capabilities and assets which the company did not have before our markets started their decline in 2015. Let me summarize the most important cornerstones of our strategy: first of all, modernized operations and technology-enabled processes. We're building on our new ERP system, which was launched in 2017. And we're deploying automated project management scheduling and tracking, integrated production capacity planning and scheduling, configured price quotation, preventive maintenance planning and tracking, CRM and others. What we're doing is literally digitizing Velan in a journey that will continue as we deploy process improvements across the company. The goal is to reduce costs but, more importantly, increase margins and agility while improving customer service.Second cornerstone is more targeted go-to-market strategies and increased end user focus. We started 1.5 years ago reorganizing our sales efforts, focusing on vertical markets. We went a step further this time by creating new business units. We get, as a result of this, P&L accountability from our new business units' general managers, improved cross-functional teamwork and the ensuing ability to sharply target attractive end user applications. Each business unit is defined in terms of its strategic and market focus. For example, the new MRO and aftermarket unit, which is led by Rob Velan, will unlock the great potential of our global installed base by working concurrently with our distributors and the end users of our products and services. Let's take another business unit, the severe service business unit, which we believe has a significant growth potential and whose main manufacturing activities will be centered in Montreal. This business unit will grow through proactive engineering and selling, compelling end users and EPCs to specify ahead of time our own metal-seated ball valve designs into the RFQs. These growth efforts will be significantly helped by the license or approvals for our designs, which we -- were recently obtained as a result of our concentrated efforts of the last 2 years. Now these license or approvals have to do with the very stringent requirements of industrial processes in the petrochemical industry, for which our valve designs have a great fit. The third and last cornerstone is our global manufacturing strategy that we're redesigning to support our customer focus and market strategies. How are we doing this? Our decision was to reorganize our North American operations from 4 plants to 3, modernize each plant and making them more product specific, dedicating them to our business units. All of this is a very important breakthrough in our transformation journey. The important investments that we're making in our manufacturing strategy will help us reduce our production overhead but, more importantly, increase agility and flexibility.So how do I summarize all of that? There is a vision behind the strategy, and it's really about transforming the company to make it less dependent on the industry cycles and much better able to shape our own fate by dictating the pace and better selecting our customers. Our commitment is to grow both sales and profitability, and we're harnessing this vision to specific top line and margin improvement goals and have equipped ourselves with the means to deliver them. Fiscal year 2019 gave us a glimpse of the promising recovery, but we're not out of the woods. The execution of the plan requires significant and well-planned investments, and I'm very thankful for the Board's support and unanimous approval of it. For example, we've set up a transformation office whose mandate is to track and measure the progress of each strategic initiative. We've been able to staff those initiatives with a balanced mix of experienced Velan employees as well as new recruits, most of whom will be later restaffed in core positions as part of our succession planning.My last words go to our Québec employees, who were shocked by the news that operations in our plant 2/7 in Montreal were going to be transferred and the plant closed in 2 years. The remaining Montreal plant just a block away is adjacent to our global headquarters and is a better and more modern building. We'll seize the opportunity to make it an industry center of excellence for severe service valves by investing in our engineering center, and we'll continue investing heavily in training our employees to meet our customers' most stringent requirements. This was the toughest of business decisions, and I understand our employees' reaction. My commitment is to keep the impact on jobs as low as possible, and we're working extremely closely with the unions. We've undergone a process with the cooperation of the Ministry of Labour, working together and finding solutions on how to deploy this. And I want to point out that we're not closing the plants tomorrow. We're taking 2 years, making sure we're going to -- we have enough time to do things right. Since the announcement, I've observed nothing but passion, resilience and the utmost professionalism from every employee. I'm proud and grateful to all of them. And in the last months, my confidence in our future has only gotten stronger as a result.So I'm going to end my remarks right here and hand it over to the moderator and ask whether there are questions that John or myself would be able to respond to.

[Operator]

[Operator Instructions] We have a question from the line of [ Stefan Dubois with Dubois Capital ].

[Unknown Analyst]

I just want to know your strategy. Velan is not covered at all by any analysts, and you don't have a corporate presentation on the -- on your web page. What is your strategy as top management to go out there and present your turnaround story and present your expertise to many investors and investment managers over the next 3 to 6 months, to next year? I think there is a lack of awareness on the part of the company to make sure that the company is followed properly. And if not, what's the point of staying public?

[Yves Jacques Leduc, President, CEO & Director]

So the -- our approach to investor relations, [ Stefan ], is put a lot of focus on our Annual General Meeting, which we hold every year, in July. There is a full presentation, and everybody is free and welcome to attend. There has been efforts, I'm told, in the past of approaching investors to talk about our stock, our strategy. The fact is that, because our stock is so illiquid, there are really not much trading happening. There is very limited interests in investment firms or investment banks to cover our company and devote coverage with their analysts. It's just the way we've been structured and the way we've been organizing since we became a public company in 1996. Our stock doesn't draw much attention, unfortunately. And what I'm told, there has been efforts, but the fact is that I think the most important event of the year from that perspective is our Annual General Meeting, where a lot of information is conveyed. And the presentation actually is loaded on our website.

[John D. Ball, Chief Financial Officer]

Yes. And that being said, after we -- our last analyst resigned and stopped covering us, it was a BMO analyst, Claude Proulx, we started getting followed by funds who specialized in investments in companies that are specifically not covered by analysts. So we started to appeal to another sort of investor precisely because there were no analyst reports on us.

[Unknown Analyst]

All right. Well, I think that a once a year as a regular annual meeting is clearly not enough. And that comes to my point. I mean the way you're structured is -- maybe is not the best way for Velan in the future and to create shareholder value and awareness. I mean I'm not sure that the company is to stay public.

[John D. Ball, Chief Financial Officer]

Yes, point noted. Thanks very much for your comments.

[Operator]

[Operator Instructions] And there appear to be no further questions. I'll turn the call back over to you, Mr. Leduc.

[Yves Jacques Leduc, President, CEO & Director]

Well, thank you very much for your attention, everybody. I look forward to seeing you at our Annual General Meeting, which is scheduled, I believe, on July 10 -- or 11. And it's a Thursday, so -- and it's on our website.Thank you for your attention, and have a good weekend.

[Operator]

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