Velan Inc

TSX:VLN

Earnings Call Transcript 2022-Q4

[Operator]

[Foreign Language]

Greetings, and welcome to Velan Inc. Q4 financial results. [Foreign Language] [Operator Instructions] As a reminder this call is being recorded Thursday, May 19 2022. [Foreign Language] I'd now like to turn the conference over to Bruno Carbonaro, Chief Executive Officer and President. Please go ahead.

[Bruno Carbonaro, executive]

[Foreign Language] Welcome to our investor presentation to review the results of the fourth quarter of the fiscal year 2022. I'm joined today by Benoit Alain, the CFO of the company, and I'll start by briefly presenting and commenting our results for the Q4 and the full year and then giving you some elements on the outlook.

We then will open the line for your questions. First, to start, the usual disclaimer. I'll let you a couple of seconds to review it. It's nothing new, but it's absolutely mandatory. Without further due, let's comment on the highlights of the fourth quarter of the fiscal year. So the sales are amounting to $125 million, which is a big increase versus the same quarter of the previous year.

Some of it is linked -- especially $8.8 million of that are linked to the reversal of some performance guarantees that even if we exclude that, this quarter is the best of the company in the last 5 years. In terms of EBITDA, $16.6 million, which is a big gap versus the $1.6 million reported for the same quarter of last year.

And -- but basically, we reported net loss which is surprising. But basically, as you may see on the slide, the big explanation of that is the derecognition of $32.6 million of deferred tax assets. In terms of backlog, we still have a very high backlog of above $500 million, even if you recall that our book-to-bill ratio is below 1. So it's only 88% but I'll explain further in the next slide on that.

And to finish, I want to comment on the strong net cash position of the company, which is above $50 million. And at the same time, as I will explain it later, we were able to reimburse a fair amount of our outstanding debt.

Now having a look at the EBITDA on the left of the slide, you have a historical view of the EBITDA on a quarter-over-quarter basis. And as you see that the third quarter in a row where we can just report a very nice EBITDA, and it's -- there is a big contrast between what you see for 2022. And for example, what you've seen in 2018 and 2019.

Now to the right, we have given an explanation of the variance between $16.6 million of this year and the $1.6 million of last year. And I focus my attention on the two first bars basically at the same time, we increased immensely volume and the margin, which is always complex in our business, not having to compromise on prices to make your volumes. And basically we found a way or just both the line to be at the same time, increasing the volume of our bookings at our sales and also maintaining the margin at more than acceptable level.

Then I'd like to comment on how we generate the cash. If EBITDA is good, then the cash is king. And you see through the last -- the transformation from EBITDA to free cash flow, $6.7 million of free cash flow out of an EBITDA of $16.6 million. I would comment this performance as fair. It's not where I'd like us to be. And you see the 3, 4 bars that explains the variation of our working cap with a good performance on inventory that are still too high, but are decreasing for the quarter.

The ARs are increasing, mainly through timing impact of our sales and the APs that are also decreasing, which is not what we expected. But basically, rest assured that we are actually -- currently working on that to increase the ratio of transformation from EBITDA to free cash flow. And to the right you have the usage of the free cash flow we have.

So you have the starting position in terms of net cash of $68 million, then you have the free cash flow, then you have the disposal of Q1, and then you end up with a cash position, which is [ $16.5 ] million, out of which you have $7 million of short-term investments. So typically, it's not cash, but if we need to transform that into cash, it's easy.

It takes some time, but there is no problem in terms of just transforming that into cash. Now let's have a look at the full year. As mentioned before, the sales for the full year amounted to $411 million which is the best number in the last 5 years.

I'm very proud of the second bullet point, which is an increase of our gross profit of 610 basis points from 26.7%, which was 32.8%, which is good. So basically, you have a lot of effort behind this number. And basically, it gives you a sense of the health of the business at the land.

In terms of EBITDA, the figures speak by itself, almost $40 million of EBITDA, which represents $1.8 per share, and it's more than double that we published for last year. In terms of loss, I already explained where we have a net loss, which is linked to exceptional items.

And I think that it's important to report to you that as a result of the good performance of the company financially and the healthy cash position, the Board has improved a eligible quarterly dividend of $0.03 per share, which was what we had in place 2 years. So that we do reinstate something which was going. And I'm happy that we can share with our shareholders, some of the value we created.

Let's now move on to some elements of perspective for the company. As I mentioned to you, the backlog is still healthy above $500 million, it's -- a book-to-bill ratio below 1, but it's not very low. And what is extremely important is the portion of the battle, which is citable in the next 12 months.

And if you go to the right of the slide that you have the stack bars and the bottom part of -- the bottom portion of the stack bars are what we can ship in the next 12 months. And you see that it's about the same number as last year. So basically what we are saying is that the backlog we have is sufficient for us to make [ this advantage ] next year.

So basically, it's good and we continue to have, I think, a good traction on the market for the bookings in the first 2 months of the year. To try to give some color around our bookings, as we did last time -- last time we presented to you we acquired for a refinery in Egypt, we decided just to highlight here, not a single project, but the very loyal customer that most of you know if you have been part of the industry in North America in the last 30 years [indiscernible] and basically, you can just have a description of who they are.

But I want just to emphasize the fact that it's the type of company, we have a partnership with -- so basically, what I call a partnership is shared efforts to promote towards the end customers, the value of our product lines and our brands. And basically, you see that the efforts that we have together currently are around [indiscernible] and basically what is good is it's important for them and we work together.

And it really is a good indication of the type of customer we want to favor in the future. We believe that the future of Velan is around our key customers -- key accounts and put in place a very clear management of our key accounts to make sure that they go with us, we go with them. So basically, we have a joint future and [indiscernible] one of those loyal customers that we will grow and that they will help us grow.

On this page, which is pretty unusual, you see 3 pictures, and we see -- 2 pictures for CFOs. So basically, it's normal because the Benoit Alain, the CFO in place, which stepped down in a couple of days as we have announced to the market in December, and I wanted to thank him for what it did during his tenure of little bit more than 1 year, basically help us modernize our current processes and systems. And I can tell you that I see difference now compared to 1 year ago.

So I'd like just to wish him well for the next step in his career, and I'd like you to join -- to welcome -- I'd like to welcome Rishi Sharma, who is an excellent complement to the team. As you may have seen, he has an amazing professional background, and I know that he will tremendously help me and the company grow in the future.

Now it's time for me to open the floor for any questions you may have.

[Operator]

[Foreign Language] [Operator Instructions] First question from [ Michael Dumas ], private investor.

[Unknown Attendee]

Nice quarter. My first quarter -- or my first question was really just maybe asking for a little bit more color -- a little bit of overview and general outlook on your specific end markets. Specifically, how meaningful could the higher energy prices and MRO activity be for you in the near and medium term?

[Bruno Carbonaro, executive]

Okay. Just -- I can tell you, you have a question, which is short-term and mid-term. Short-term year, we are in a very complex environment where you have a war which -- in Ukraine. And when there is uncertainty, we're in the CapEx business -- any time there is an uncertainty on the market, even if -- when you see the prices of commodity going up like -- the price of energy going very, very high and then decreasing and people thinking about recession.

It's extremely difficult for decision-makers to make decisions around new projects. So basically what we see in our end market is we continue to have a high trend for MRO, basically maintenance or small CapEx jobs. And here, there is traction on the market. But for anything which is major, large investments, it's a little bit complex for our customers to sanction their projects, i.e., we see a lot of positions going out.

We have a lot of position activity but the timing of the projects are completely unsure. So basically, we knew that [ the year ] will be soft, and we were expecting some rebound in the market in Q1.

To be honest, I think Ukraine is taking a toll on the ability of our customers to make that decision.

[Unknown Attendee]

Okay. No, that's helpful. I appreciate the comments there. My second question is on the provision taken in the quarter relating to the ongoing asbestos litigation. Do you now think that you've fully provision for all future expenses? I'm just trying to make sure I understand the MD&A correctly, because it does feel like the number is relatively light versus maybe some of the prior expenses in the quarter.

So just maybe provide context as to what we should expect going forward?

[Bruno Carbonaro, executive]

Well, I suggest Benoit will answer. It is very technical, and I want to make sure that it's clear what we put in. Benoit, could you elaborate on that?

[Benoit Alain, executive]

Yes. Well, there's -- in the assets, there's 3 components. There's the claims that we know we will settle -- claims that we know that -- well, the chance of settling or a low number is high. And the third 1 is all the future claims.

This year, we took a more conservative approach versus previous year. You see the total expense for the full year is $25 million asbestos, $12 million is related to the same asbestos last year. So essentially, we take a provision on the first category I mentioned.

But this year, we decided to, as I said, take a more conservative approach, and we took a provision on the first 2. We still don't make any provision for future claims that we didn't receive yet. So that's the current service solution. But again, this is definitely a lot more conservative than previously. And those numbers -- those extra expenses are part of our EBITDA this year.

[Unknown Attendee]

Understood. So the expenses going forward should go down but not disappear. Is that the right way to think about it?

[Benoit Alain, executive]

You're absolutely right.

[Unknown Attendee]

Okay. Okay. And then I guess I'm going to ask 1 more. I don't know if there's anybody in queue, but I'll ask a couple more.

In terms of the balance sheet and the cash flow, nice to see the improvement in ARs. You still have 180 days in inventory. I mean that's -- your inventory position is actually larger than your market cap. Any way you can give us a sense for what the longer-term objective is in terms of getting the inventory and the working cap in the right place? And just, I guess, the time it will take to get there and the final destination?

[Bruno Carbonaro, executive]

Yes. I'll explain -- the question is very relevant. So thanks for asking. Basically, it's a little bit complex for us to stabilize and decrease our inventory at the moment where we have difficulties to ship.

And basically, we still are impacted by the impact of COVID-19. The difficulty to get our goods out of China and India, a lot of our customers is finding reasons not to take possession of the goods. So basically, in the inventory, what is important is to go a little bit deeper on what raw material, what's finished part, which -- what is [indiscernible] and what is finished goods. I can tell you that we are spending a lot of time on that.

Basically, what we hope is that when we have finished with the high repercussion of the COVID-19 and the war in Ukraine, basically, we will be in a position to reduce immensely. And I think that it's sizably if I made it precise.

The problem is to do that and to do that not only in North America but all over the world, we need to put in place a project that will be led by Rishi and it takes time. So don't expect miracle in the next first quarter.

But basically, it's definitely a long-term objective for the company. And to give you an example, on the viable pay structure of our companies, not only in North America, but also outside, we introduced the cash generation and the working cap as one of the key elements we base -- that we pay on.

[Unknown Attendee]

That's helpful. And I guess just an extension to that. I mean, nice to see the dividend reinstated. It looks like profitability has moved thoroughly in the right direction, cash flows are again better. The balance sheet is, I'd say, more than sufficiently capitalized.

How should we think about additional capital deployment going forward? What are your thoughts are in terms of return of capital versus M&A?

[Bruno Carbonaro, executive]

It's a very broad question. That's -- it's a little bit complex for me just to be very precise on what I would be saying. The good news is we generate cash. And the good news is we're in an industry where you have a lot that is going on. And basically, not only we are generating cash, but our profitability is good. We most probably be among the people that can set the tone in the industry.

How, when, it's completely unclear. But basically, the good news is now we can have our destiny in our hands, and it's much more convenient than most probably a couple of years ago.

[Unknown Attendee]

Yes, I would agree. Nicely done the year...

[Bruno Carbonaro, executive]

We had a lot of [indiscernible] questions, I don't know how to manage that, but I don't want to just people have been frustrated by only having 1 person just sitting with me, sorry to be rude, but I see that -- I see questions on the Q&A. So how do we proceed. I don't know, should we...

[Unknown Executive]

What I suggest that we can move on -- and Michael, if you have other further question, maybe go back on the queue to let the chance for other people, please.

[Operator]

[Foreign Language] Our next question from Stephen Takacsy, Lester Asset Management.

[Stephen Takacsy, analyst]

Yes. Sorry, can you hear me?

[Bruno Carbonaro, executive]

Yes.

[Stephen Takacsy, analyst]

So I'd also send them through the chat. So the first question was what are the normalized margins when you back out the revaluation of performance guarantees and the Canadian wage subsidies for the quarter and also for the year. So that would be my first question.

[Benoit Alain, executive]

It's about -- for this quarter, it's about an impact of 5%. So when you look at our gross margin, 38% versus 27% last year. And if you take out the $8.8 million, it would give up about 32%, 33%.

[Stephen Takacsy, analyst]

Okay. And is there still some Canadian wage subsidy in this -- in the latest quarter?

[Benoit Alain, executive]

No.

[Stephen Takacsy, analyst]

Okay, 0 in the quarter. So when you're referring in your MD&A to less wage subsidies this quarter, they're actually 0 both in the cost of goods sold and in the SG&A, correct?

[Benoit Alain, executive]

Yes.

[Stephen Takacsy, analyst]

Okay. The other question is -- and you sort of touched on it a little bit, but are you facing some -- because you have operations in China and clients in China? Are you facing supply chain issues there or elsewhere currently?

[Bruno Carbonaro, executive]

Yes. We still have the congestion in the port of Shanghai, which is pretty congested. And it touches at different levels. First is, yes, in the actual supply of goods coming from China, but also now there are more competition in the supply chain that is moving to India. So it's more difficult also to get our goods from India, even if there is no port congestion, but basically, they are just overwhelmed by the workload.

And then the third thing it has an impact on the bookings because basically, as there is difficulty to get access to goods and that the pricing are changing from 1 day, day 2 to the other. It's extremely difficult just to sign an agreement with the customer on the price of a day. So basically, yes, we are continuing the supply chain and the price increases and decreases of the commodities, as an impact on the performance of the company and still has.

[Stephen Takacsy, analyst]

Right. And so are you still -- like what's the margin objective? Are you still trying to maintain margins in the -- gross margins in the 30% to 35% range. Is that a fair assessment?

[Bruno Carbonaro, executive]

Here, we reported -- last time we discussed about our different markets. And basically, intrinsically, our 5 BUs Bs have different targets. And depending on the mix, it could change. Because basically, you don't have the same for MRO or SSBU, [indiscernible]. And basically -- so basically, what we expect is that we will maintain on the BU for BU basis the same gross margin this year than last year. But then you have the mix effect that I won't comment on.

[Stephen Takacsy, analyst]

Okay. Sorry, I missed that you're trying to maintain the what, sorry?

[Bruno Carbonaro, executive]

We have 5 strategic markets. What I'm saying if we still maintain it as a target of 25%, let's say, last year, our target this year is to maintain or to exceed this 25% because...

[Stephen Takacsy, analyst]

Prior year's margins in each market.

[Bruno Carbonaro, executive]

That was my point. Sorry, if I was not clear.

[Stephen Takacsy, analyst]

Okay. And then finally, I appreciate the dividend, but it's very poultry and to me it doesn't add any value to the shares. Why aren't you buying back your grossly undervalued shares, which would be much more accretive to all shareholders than reinstating a dividend. It makes no sense to me.

[Bruno Carbonaro, executive]

Most probably the Board should address this question. I'm not sure I'm qualified just to do that. The good news is that the board approved the dividend, and I think it goes in the right direction.

[Stephen Takacsy, analyst]

Yes. But better use of capital would be to be buying back your shares, which are trading at less than liquidation value as a prior question that pointed out.

[Operator]

[Operator Instructions] [Foreign Language] Our next question is from [ Jean Francois ], Private Investor.

[Unknown Attendee]

[Foreign Language]

[Bruno Carbonaro, executive]

[Foreign Language] So the question was, do we -- can we give a split between the different 5 business segments? And the answer is we don't do that. And we have no intention to start doing that for obvious competition reasons. So that's -- we don't want our competitors to know. So basically, yes, you can just have a trace of what we can offer in our different communications, but we won't be more specific.

[Unknown Attendee]

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[Bruno Carbonaro, executive]

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[Unknown Attendee]

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[Bruno Carbonaro, executive]

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[Unknown Attendee]

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[Bruno Carbonaro, executive]

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[Unknown Attendee]

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[Bruno Carbonaro, executive]

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[Unknown Attendee]

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[Bruno Carbonaro, executive]

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[Operator]

[Foreign Language] We have another follow-up question from Stephen Takacsy, Lester Asset Management.

[Stephen Takacsy, analyst]

Just a follow-up question to the previous gentleman's question on the asbestos litigation. So if I understand correctly, of the $25 million, you said $12 million is by the previous method of claims that are settled during the quarter and then $13 million as a provision for future claims.

So to follow up on the same line of thinking, as the previous question, if you receive a new claim, is that going to be automatically expensed? Or is it just if that -- if the accounts feel that, that claim needs to be provided for? In other words, the $13 million that you've provided for, is that all the future claims that have been issued against you? Or those are just the ones that are the most likely to be settled? Because if you get another claim tomorrow morning, is that going to suddenly show up in the P&L for the current quarter?

[Bruno Carbonaro, executive]

Actually, the -- there's nothing -- no provision for future claims. So it's just that before we were taking a provision for claims that we were sure to settle, now we take a provision for all the claims that we have.

[Stephen Takacsy, analyst]

Okay. And that will be [indiscernible] as claims are filed, on an ongoing basis because this has been going on for a long time, as you know, then those will automatically just appear during the quarter, whether they're justifiable or not.

[Bruno Carbonaro, executive]

Exactly.

[Stephen Takacsy, analyst]

Okay. Congratulations on the much improved results. I don't want to be overly negative, but a lot of progress has been made with the turnaround plan -- and by your predecessors and by the current management team. So well done on that.

[Bruno Carbonaro, executive]

Thanks.

[Operator]

[Foreign Language] we have no further questions on the line. I'll it back to you.

[Bruno Carbonaro, executive]

Okay. So thanks a lot for your attendance. Just to let you know that the presentation will be posted on our website in French and in English. So don't hesitate to refer to that. And if you have any further questions, you know our details, so you can just call us. Thanks a lot. Have a nice day. Bye.

[Operator]

[Foreign Language] this concludes the conference call for today. We thank you for your participation. You can disconnect your lines. Have a good day, everyone.