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Velan Inc
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Greetings, and welcome to the Velan Inc. Q4 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, May 21, 2020.I would now like to turn the conference over to Yves Leduc, CEO. Please go ahead, sir.
[Foreign Language] So it's been quite a year. Welcome, everybody. Fiscal year 2020 began with one of the most significant announcements in the company's history, a transformation plan that now every employee knows is V20 that aims to make the company more agile and laser-focused on serving our customers. And as the deployment efforts of the V20 plan grew in momentum over the year, the company was able to deliver improved adjusted results recovering from a bad first quarter. And then just when the blue skies were looming, the global economy was shattered by COVID-19.So before I dive into the year's summary, let me start off with what would normally be my conclusion. Thanks to the great progress in transforming the company. And through the many actions taken across our global operations, Velan is far better equipped today and more resilient to navigate through the storm and to rebound when the economy recovers. Furthermore, our new President, Bruno Carbonaro, with us since November, has brought an enormous wealth of industrial experience and his outstanding talent, and along with other very capable new hires, they're increasing our leadership capacity at a very important juncture in our history.So let me start with the sales, order bookings and backlog. Story here is that we recovered from very disappointing first quarter results. Sales increased for the year. But before I actually go into the year, I'm going to be -- because of the fourth quarter results, I'll be giving you a global summary of the year, but since it is also about the quarter end, let me just summarize some of the highlights of the quarter that you also have in the press release saying that sales for the quarter were $113.6 million. That was for a net loss of USD 11.1 million for the quarter, of course. Operating profits before restructuring and transformation costs under the V20 plan was $6.2 million for the quarter. We had an adjusted EBITDA of $9.9 million for the quarter. Net new orders received during the quarter were $88.3 million. And everything else I'll be covering through my year -- whole year summary.So again, back to the whole year summary, sales increased by $4.7 million or 1.3% from the prior year, thanks to an increase in shipments from the company's Italian operations that resulted from a record backlog in the upstream oil and gas industry. The Italian performance was partially offset by decreased shipments from the company's North American and French operations.Bookings decreased $32 million or 8.6% from the prior year. That is largely due to the fact that both our Italian and French subsidiaries had recorded significant project orders at the end of the previous year. Also in North America, our MRO business, experiencing last year a more normalized stocking replenishment cycle, could not repeat the unusually high surge of nonproject valve restocking orders that was experienced back in fiscal '19, the previous year.We ended the period with a backlog of $406.8 million, a decrease of $42.9 million or 9.5%, resulting from a book-to-bill ratio of 0.92. However, those numbers, while not satisfactory, are not fully reflecting the business performance of fiscal year 2020 as they were dragged down by low booking and margin performance in the first quarter that we've gradually recovered from in the following 3 quarters.Let's talk about the performance. We've experienced a net loss while the operating profit and EBITDA show improvements when adjusted for restructuring and transformation costs. Net loss amounted to $16.4 million $0.75 per share compared to $4.9 million or $0.23 per share last year. Net loss for the year was significantly impacted by a onetime $8.2 million noncash tax adjustment to derecognize unused tax losses as well as a nonrecurring amount of $9.6 million as part of the company's restructuring and transformative V20 plan.With regards to the noncash tax adjustment of $8.2 million, this is a derecognition under IFRS standards. We will be able to re-recognize it in the future. If it's required, we will not lose the ability to use it in the future, in other words.Back now to the restructuring costs, these costs include cash severances, temporary project resources and the travel and lodging costs as well as the moving costs related to dismantling and transportation of machinery and equipment required to optimize our manufacturing footprint. Again, that amounted to $9.6 million as nonrecurring restructuring costs for V20.The company recorded this $8.2 million deferred tax expense related to derecognition, as I said. And if we exclude both the $8.2 million and the $9.6 million for the derecognition of the tax -- deferred tax and the $9.2 million as part of our nonrecurring restructuring and transformative costs, the company's net loss would have been $1.2 million compared to $4.9 million last year, representing an improvement by $3.7 million.Meanwhile, operating profit before restructuring and transformation costs amounted to $2.9 million compared to a comparable operating loss of $7 million last year. Adjusted EBITDA amounted to $16.1 million or $0.75 per share compared to $7.1 million or $0.33 per share last year. These improvements in our performance adjusted for nonrecurring transformation costs are primarily attributable to successfully decreasing our administration costs and an increase in gross profit percentage. On this adjusted basis, the company was able to make an operating profit for the first time since fiscal 2017, while our adjusted EBITDA of $16.1 million more than doubled compared to last year.What drove gross profit to increase by $2.5 million or from a percentage point of view, from 23.3% to 23.7%, 40 basis points? Let us remember that gross profit landed on 19.2% at the end of the first quarter. So the recovery in gross margin in the following 3 quarters averaging 25% was significant. This came from a combination of several factors, reflecting, first, the exceptional shipment performance of our European operations; second, a very poor first quarter performance by our North American operations was partially offset by a gradual increase in margins through the last 3 quarters, thanks to a reduction of our production overhead in accordance with the V20 plan, to a better mix and to our business units' increased focus on higher-quality orders.So that's it for a summary of our results. Now what I want to do is talk more specifically of the transformation plan, V20. We're ahead of the plan in terms of schedule despite the early challenges of ramping up experienced earlier last year. In the last 20 years, Velan has continued to live up to its superb brand reputation as leader in valve technology and product quality, while our business competitiveness, mainly with respect to our North American operations, lost a lot of ground to an increasingly competitive industry. So we had no choice, our business model had to be changed in order to better leverage our assets and strengths, and the business case that led the Board of Directors to unanimously approve the strategy announced in January 19 consisted in significant recurring bottom line improvements achieved by fiscal year 2022, that's next year, justifying one-off investment and restructuring costs to carry out the transformation.A year later, where do we stand? There is much good news. First, thanks to the resourcefulness of our project teams and to growing North American project bookings, we will require less than half of the one-off V20 investment while realizing higher recurring bottom line benefits. Second, although the greater portion of the V20 return on investment was to be realized in fiscal '22 and beyond, the company is already capturing the benefits of its modernized systems and new approach to markets and, in many ways, is already deeply transformed. What I want to do now is remind you the 5 key pillars that define V20 and give you a progress update against each of the 5.First pillar was drive growth, thanks to greater customer intimacy through 5 integrated and focused businesses, 2 of which already existed, the French and Italian operations, and the 3 others basically recentering our North American operations. So that's lever one. Lever two, reorganize to consolidate 4 North American manufacturing plants into 3, creating more specialized manufacturing centers; lever 3, drive substantial savings in cost and cycle time by shifting our North American manufacturing operations towards a leaner, less vertically integrated model centered on production cells; lever 4, to our state-of-the-art, low-cost Indian facility, transfer all nonnuclear and non-Navy, small forged valves as well as pressure seal valves normally destined to our MRO business; and the fifth lever, not the least, was to continue to invest in systems and processes to improve customer service through, for example, best-of-class project management, modernized cost monitoring and configuration pricing.So there's been progress against each of these 5 pillars. And let me summarize the progress, first of all, with respect to the 5 strategic businesses. They can each boast of remarkable achievements, thanks to their business focus and the coherent market activities. I already mentioned the Italian operations delivering record sales last year, and our French operations, still, by far, our most successful business. Meanwhile, in their first year, the newly created North American project manufacturing business units contributed to the company's much improved performance in the second half of the year, registering excellent bookings in the petrochemical, mining and power sectors while earning the trust once again of the American defense industry with substantial orders in connection to its current shipbuilding activities.In the fall, after several months of negotiations, an agreement between the company and our unions was successfully reached on how to proceed with a shift towards a new lean production cell model. Following this milestone agreement, projects were accelerated and production in our large Montreal plant 2/7 will be stopped 5 months ahead of the original plan.Production transfers to India, they will also be completed as planned this fiscal year. This move, combined with the reduction of production overhead in North America, will greatly improve the economics of our global MRO and aftermarket business unit. And with respect to systems improvement, we're changing the way we do business, and we made substantial progress in modernizing our systems and processes. That's an effort that was initiated a few years back. Let me cite just one example. We've made our project management capabilities a distinctive competitive asset, and the results measured in terms of on-time delivery are impressive. And believe me, they are noticed by our customers.We've had many other notable achievements outside V20 progress, and I'll just mention 3 in the areas of market development and product innovation. As I mentioned earlier, the company's underperformance in recent years was largely driven by North American operations. Through this period, the economic performance of our international subs has remained steady. Our Italian operations at Velan ABV are a great example of this dynamism as we recently signed a joint venture agreement with a Saudi partner, a key milestone in our Middle East strategy, the largest valve market in the world.Our French operations, renowned for their leadership in the nuclear market, have been able to diversify their innovation capabilities into several nonnuclear initiatives over the years. The latest successful venture securing new orders of cryogenic valves for the Indian aerospace industry, a very promising field. And I would say that you don't want to tell our French team that their business is only nuclear. They'll be quick to prove you wrong.Finally, the market will soon see many new product introductions from Velan. Since I want to keep this confidential, the only thing I'll tell you is that they're aimed to be groundbreaking or market opening for us. And I'll just say today, stay tuned for a few very important major product news to come in the course of the year.COVID-19, both a dark shadow and an opportunity to stand out. What do I mean? Although this year's message to shareholders has a positive edge to it because of our progress with V20 and the improvement in our operating results, the dangers of the terrible economic crisis that has assailed the world are certainly not lost on the Board and my management team. As supplier of critical equipment to essential industries where -- we were spared the most immediate and devastating consequences of the crisis, and I'm very proud about how our multinational organization has responded in a very admirable fashion and enabling remote work in a matter of days, protecting those employees showing up every day at the shop and ensuring the continuity of our global supply chain.But no one can foretell how deep and long the global recession will go. In such a volatile environment, we should first be thankful for the progress made in fiscal year 2020, in driving process improvements, eliminating significant structural costs and bringing about a new market focus. The combination of all of this has made the company lighter and more agile and much more resilient to great shocks.Second, we will continue improving the work environment, making it safe and secure -- as safe and secure as possible for employees. Like many other companies, we're writing a book right now on how to manage a manufacturing company through a pandemic. And we've had a couple of months' head start over many, many other industries because, as I said, we were essential supplier to essential industries. But we're still learning. And I think we're doing a really good job. The well-being of our employees and their family will remain our most important concern.Third, the crisis will inevitably reshape our industries. How do we plan through the [ thought ]? By remembering our [indiscernible] employees every week at a weekly video that started 2 months ago. I'm going to record my tenth tomorrow. I talk about remembering what we're about. We're a manufacturing and technology company with a remarkable track record of standing for our customers with reputed product and services that keep those essential infrastructure industries, cornerstones to the world economies, safely running.Our customers' needs will evolve rapidly. If we pay attention and listen to them every single day, we'll find innovative ways to serve them, to reassure them. There's disruption ahead and maybe possibly upheaval, but our employees have already proven their capacity and resilience in handling enormous change and turbulence. Their resolve bolsters our confidence in an uncertain future. And in many ways, the crisis is bringing our employees from across the world closer. And I can tell you that I believe collaboration among employees, various departments, from subs from across the world has never been stronger. So on behalf of our Board and the Velan family, I thank our employees and add, let's keep going.On this, I'll hand it over to our moderator, and John and I are here to answer your questions.
[Operator Instructions] Our first question comes from the line of [ Jean Lahotte ] with Velan.
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[Foreign Language] Just to summarize, the question was largely about what's happening with the manufacturing facilities. So as I said, we are reducing our number of plants in North America from 4 to 3. The production from plant 2/7, which will be closed once we're finished production in the next couple of months is going to be transferred either to Granby, either to the other Montreal plant or either to Williston in Vermont. And I explained the specialization principles that if we have quarter turn valves, multiturn valves, quarter turn valves will be in the Montreal facility coming out of 2/7 and multiturn valves will largely be in Granby, but we keep Williston as a center of excellence for Navy and nuclear and also other multiturn valves, kind of a complementary capacity to Granby. And we're ahead of plan. And once the plant 2/7 is closed, we will proceed to sell the property.
[Operator Instructions] There are no questions at this time. I will turn the call back to you, sir.
So maybe the person with whom I was just talking had another question for me. So maybe we allow him to ask his last question.
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[Foreign Language] What I'll do is I'll, to the best of my memory, translate the exchange I've just had. It had to do with our dividend policy. So our decision is not to cancel our dividend policy but to suspend it on a basis that will be reevaluated every quarter, and we're doing like most companies are doing right now in the face of a very uncertain, volatile economic environment. We're not taking any chances and we're just protecting our cash. And so this is what the family and the Board has decided, not to pay a dividend at this stage.Other questions had to do with the performance of our plants, why do we choose to shut down plant 2/7. It had nothing to do with the actual performance of one plant over another, but as explained last year, had to do with, first, the decision to reduce our manufacturing capacity. And for all sorts of reasons that had nothing to do with the performance of one plant over another, we decided we would close plant 2/7 and consolidate activity into the 3 others. That was basically the exchange I just had. Maybe another chance, any follow-up questions, and then we can maybe conclude. So I hand it over to the moderator and maybe leave it to additional follow-up questions from anybody else if there is an interest.
[Operator Instructions] Our next question comes from the line of [ Dean Trottier ], private investor.
I hope to just get a little more color on the V20 plan and I guess how you managed to get quite a bit ahead of schedule with it. If you could -- if you have anything you can give me to help me understand it a little bit more, that would be great.
So you're saying -- you're asking why we're ahead of schedule? Or what does it mean to be ahead of schedule?
I guess if you could give me a little more color on why you're ahead of schedule. What kind of has happened right? I guess unanticipated that's gone correctly to get you ahead of schedule.
So I think we're ahead of schedule largely because -- and I want to state that -- and a lot of great talent stepped up. And as I said, not only are we ahead of schedule, but we reduced the original estimated spend quite dramatically. And that's because we had folks who stepped up, we basically spared the company from hiring consultants or construction support, so we saved money there. We have a lot of knowledge internally. And when you combine the decision of how to sequence the very complex task of moving out machines from one plant to another or reconfiguring plant and so on with a very deep valve knowledge that we have, we were able to gain a lot of time.And so the construction work in the plants moving on very, very fast. The management of our backlog and reassigning it as we go was helped by the implementation of capacity planning systems that we didn't have before. So it's like everything was converging, and people feel the urgency of turning the North American operations back to profitability. And that urgency has basically defined a sense of purpose that I think is defining our company very well.In terms of where we are right now, the -- at the end of the year, we will have one plant fewer earlier than originally estimated, which means a lot less structural costs to deal with. We're going to have transferred everything we needed to transfer to India. Those valves that we lose our shirt with, commodity valves that -- and India was ready to get them. So that's going to help us increase our margin on commodity valves.We've made tremendous progress on systems deployment. If you've been following the analyst call for the past 4 years, you've heard me talk about the need to bring back our delivery performance to acceptable levels in the industry because we had a reputation for late deliveries. And right now, since we deployed the new system a year ago, our results are stellar. It's fantastic. And I really believe we have a distinctive competitive asset that makes us unique in the market. It's been actually 2 years of drawing up the project management process and deploying the system. And so basically the whole project management now is automated and we're able to track every line of every order we get assigned to any given plant and know what's going on and be very proactive about corrective measures when there are curve balls thrown at us, and they're always in project management.So you bring it all together. And as I said, we're already deeply transformed, even though the work is not finished yet. There's still a lot of work to be done. Deployment of production cells in the Québec plants, for example, that's going to happen in the second part of the year, but it's going to happen with far less structural costs to support. And last but not least, the creation of our strategic business units about a year and a quarter ago. We're off to -- like everything, it's a new start. And at the end of the year, we were able to record tremendous orders in the mining business, where we hadn't had orders in years, petrochemical, chemical, the power business, where we've seen a slowdown in the previous years. And that has a lot to do with the focus, the focus of creating cross-functional teams that define market strategies and go after end-user customers. So it's all adding up, and it's -- basically what you're seeing is a reinvented Velan that's emerging. I hope that answers your question. Any other questions?
There are no questions at this time, sir.
Okay. So on this note, I'll say thank you for listening, and we look forward to the next quarterly call in July. [Foreign Language]
That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.