Velan Inc

TSX:VLN

Earnings Call Transcript 2023-Q4

[Operator]

Greetings and welcome to the Velan Inc. Q4 Financial Results Conference Call.

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[Operator Instructions]

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As a reminder, this conference is being recorded Thursday, May 18, 2023.

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I would now like to turn the conference over to Bruno Carbonaro, Chief Executive Officer and President. Please go ahead.

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[Bruno Carbonaro, President & Chief Executive Officer]

Hi, everyone, Bruno Carbonaro speaking. Thanks for joining our conference call today. Let's start with the usual disclaimer.

The first section of the disclaimer mentions that the presentation provides an analysis of our consolidated results for the quarter ended February 28, 2023. The Board approved its results yesterday on May 17, 2023. The second paragraph refers to non-IFRS and supplementary financial results which are reconciled at the last page of this presentation. Finally, the last paragraph refers to forward-looking information which are subject to risks and uncertainty and can't be guaranteed. The forward-looking statements contained in this presentation are expressly qualified by this cautionary statement.

Now, let's proceed with the call. Welcome to our fourth quarter fiscal year 2023 conference call. I am joined today by Rishi Sharma, our CFO. This presentation will be made available shortly on our website in the Investor Relations section. I will start with a brief summary of our results, then I'll pass the baton to Rishi, who will further develop key performance items and then I will close with my closing comments. Please note that as mentioned at the beginning of the call, we will not be taking questions at the end of the call today.

Let's have a look at our key highlights for our fiscal year 2023 Q4. We recorded sales of $115.1 million which is an improvement of $19.9 million and 20.9% versus the Q3 of the same fiscal year. However, it's a decrease of $9.7 million versus the Q4 of fiscal year 2022. And you should notice that the last year quarter 4 included a reversal of provision for performance guarantees that didn't occur this year.

We reported a net loss for the quarter of $47.2 million or $2.80 per share compared to a loss of $25.6 million or $1.19 per share last year. The net loss for the quarter is significantly impacted by a $56 million charge to increase our asbestos provision to reflect the potential settlement value of future unknown claims based on actuarial study. Rishi will discuss more in detail the reasons for the increase of the asbestos provision later in the call.

The report and adjusted net income for the quarter of $8.8 million or $0.41 per share compared to $7 million or $0.32 per share last year. During the quarter, we generated $20.9 million of net cash, primarily through our operating activities. Our net cash amounted at the end of the period to $50.3 million, a decrease of $3.2 million or 6% compared to the previous fiscal year. The overall available liquidity remains strong with $140.9 million of available cash on-hand and facilities.

Finally, the Board elected yesterday to declare a $0.03 per share dividend payable on June 30 to all shareholders of record as at June 16.

I now turn over the mic to Rishi, who will comment more in detail our performance.

[Rishi Sharma, Chief Financial Officer]

Thank you, Bruno. Good morning, everyone. Starting with the backlog; total backlog decreased by $36.9 million or 7.4% since the beginning of the fiscal year and amounted to $464.3 million as at February 28, 2023. The reduction of the backlog is primarily due to the weakening of the euro spot rate against the U.S. dollar since the beginning of the fiscal year which represented $17.3 million.

The lower than 1.0 book-to-bill ratio also caused a reduction in the backlog for the fiscal year. And it is important to note that the significant output and sales activity for Q4 at $115 million was also a partial reason for the overall reduction in the backlog. It's important to note that within 12 months, our backlog that needs to be shipped is relatively stable from last quarter of last year.

Bookings for the quarter amounted to $87.1 million, an increase of $10 million or 13%. The weakening of the euro average rate against the dollar on order bookings for our European operations resulted in a negative impact of $3.6 million in the fourth quarter compared to prior year. The increase in the quarter on bookings is attributable to higher order intake in both our French and German subsidiaries, mostly related to the nuclear market, partially offset by lower bookings in our Italian operations, notably in terms of downstream oil and gas orders.

If we look at sales for the quarter, it amounted to $115 million or an increase from the previous quarter of $19.9 million or 20.9%. This continues to show the ramp up quarter-over-quarter and a strong finish to the second half of the year relative to the softness started in the first. This sales volume does also reflect a decrease of $9.7 million or 7.8% compared to the last quarter of the previous year.

The weakening of the euro average rate against the U.S. dollar had a negative impact of $3.8 million on our sales compared to the last quarter last year. Sales for the quarter were also negatively impacted by decreased shipments by our Italian operations on orders destined to the oil and gas markets. Our sales in the previous fourth quarter were also positively impacted by a reduction of our provision on performance and liquidated damage guarantees of $8.8 million. Finally, we've seen activity increase in the MRO business which offset some of these decreases mostly in the North American operations.

If we look at EBITDA -- let me start by mentioning the asbestos adjustment that we've taken for the quarter. Throughout several quarters, historical quarters and over the last several years, as we have seen, asbestos costs have shown an increasing trend. As you are aware, during our strategic process, we -- and throughout the fourth quarter of the fiscal year, we were able to better estimate the impact of unknown asbestos settlement costs. This was a result of the information we obtained during the process and during the fourth quarter.

The result of this revaluation led to a nonrecurring onetime charge of US$56 million to increase our asbestos provision related specifically to settlement and indemnity costs. This provision increase does not relate to legal and defense costs related for those claims. Adjusted EBITDA for the quarter amounted to $16.5 million or $0.76 per share compared to $16.6 million or $0.77 per share last year. The slight decrease in adjusted EBITDA for the quarter is primarily attributable to a decrease in absolute gross profit, higher other expenses and a $4.6 million nonrecurring gain, after minority interest on the disposal last year of our investment in the Juwon Steel company. These negative movements in adjusted EBITDA were almost entirely offset by a reduction in administrative costs, excluding the previously discussed $56 million adjustment to our asbestos provision.

If we look at gross profit; gross profit for the quarter amounted to $39.9 million, an increase from the previous quarter of $11 million or 77.9% but a decrease of $7.8 million or 16.3% compared to the last quarter of the previous year. The gross profit percentage for the quarter of 34.7% was a decrease of 350 basis points compared to last year's final quarter. The gross profit percentage was negatively impacted by the favorable revaluation of the provision for the performance guarantees I just spoke about in the prior year. The decrease in gross profit percentage for the quarter is primarily attributable to the lower sales volume which impacted the absorption of fixed production overhead costs.

Additionally, our gross profit benefited from a favorable revaluation of our inventory provision based on new estimates relating to changes in market demand for slow moving, aged and obsolete inventory. Finally, our gross profit for the quarter was negatively impacted by unfavorable foreign exchange movements when compared to similar movements from the prior year which were primarily made up of unrealized foreign exchange translations related to the fluctuation of the U.S. dollar against the euro and the Canadian dollar.

The increase in other expense is primarily attributable to the recording of a $1.8 million other provision related to a commodity tax audit. Administration costs in the prior year included $13.1 million charge to increase the asbestos provision to account for all known litigations rather than for only settled amounts.

Looking at the chart above in the presentation, you see that administrative costs, excluding asbestos, were about $1 million lower than the prior year's final quarter, showing the improvements that we put in place to offset and mitigate the asbestos cost that we experienced and reducing our administrative costs overall for the company.

Moving on to cash; a very strong quarter for us; we're very pleased with the results. Our net cash amounted to $50.3 million at the end of the quarter, an increase of $20.9 million or 71.4% compared to the previous quarter of the fiscal year. The increase is primarily due to the strong free cash flow generated for the quarter which was highlighted by a healthy EBITDA and solid noncash working capital movements, mainly related to inventory. This $50.3 million is a strong security for us as we enter into the ramp-up quarters of Q1, Q2 of the new fiscal year.

With that being said, I'll pass it back over to Bruno for his closing comments and key priorities as we progress.

[Bruno Carbonaro, President & Chief Executive Officer]

Thanks, Rishi. My final comments are as follows. First, our current backlog offers us a good visibility for the future. We are also working on a large pace of commercial opportunities in various regions of the world. We continue to focus our efforts on the flawless and rigorous execution of our contracts. Our ultimate goal is to preserve our cash base and our strong liquidity. And last but not least, we continue to work with Flowserve to ensure the successful closing of the transaction announced earlier this year. Thanks for your attention.

[Operator]

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