Velan Inc

TSX:VLN

Earnings Call Transcript 2024-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Velan Inc. Q4 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Friday, May 17, 2024, I would now like to turn the conference over to Rishi Sharma. Please go ahead.

[Rishi Sharma, executive]

Thank you, operator. Good morning, and thank you for joining us for our conference call. Let's start by discussing the disclaimer from our related IR presentation, which is available on our website in the Investor Relations section.

As usual, the first section mentions that the presentation provides an analysis of our consolidated results for the fourth quarter and fiscal year ended February 29, 2024. The Board of Directors approved these results yesterday May 16, 2024.

Second paragraph refers to non-IFRS and supplementary financial measures, which are defined and reconciled at the end of the presentation.

The last paragraph refers to forward-looking information, which are subject to risks and uncertainties that are not guaranteed to occur. Forward-looking statements contained in this presentation are expressly qualified by this cautionary statement.

Finally, all amounts are expressed in U.S. dollars unless indicated otherwise.

I now turn the call over to Mr. Jim Mannebach, CEO and Chairman of the Board.

[James Mannebach, executive]

Thank you, Rishi, and good morning, everyone. It's nice to join you again, Velan's standard fiscal 2024 proved to be generously less than an optimal year, first marked by challenging global economic and environmental disruptions. But for us, I think perhaps admittedly the distractions caused by the failed transaction, as you know, terminated with the failure of French to approve the transaction.

The result was very distracting for our company and diverted us from full attention to execution of our strategic plan. Nonetheless, adjusted EBITDA totaled $17.8 million on sales of $346.8 million. Both figures were however below prior year.

We're highly encouraged, though, by sequential increases in bookings that they're in the fourth quarter, a trend that's frankly continued into the first quarter as well. As a result, our order backlog at the end of the year stood at $491.5 million. Nearly 3/4 of that backlog is expected to be shipped within a 12-month period. Rishi will provide you with more details in his financial review, but I want to emphasize that we fully expect Velan to return to growth mode in fiscal 2025 based on our strong booking momentum and our corporate culture.

Go to Slide 5. As Chairman of the Board, newly appointed CEO during the past year, I embarked on tour to get the perception of employees, customers and partners towards our company. I returned emboldened by what I heard, strength of our brand, the quality of our products, our position in the marketplace and above all, the dedication and skill of our people assure we remain second to none in the market.

We're a global company with headquarters in Canada, not merely a Canadian company with overseas operations. We have R&D centers here in Montreal, as well as in France, Italy and India, each developing innovative technologies to improve the performance and reliability of our valves to the benefit of our customers worldwide.

Our research hubs are supported by 12 manufacturing facilities and 2 distribution centers. We view our global footprint as a strong competitive advantage in terms of offering a diverse relevant product portfolio at scale and in a cost-effective manner.

Let's turn to Slide 6 for an overview of our key growth markets. Looking ahead to fiscal 2025 and beyond, we plan to increase our reach in the high-growth sectors like nuclear, defense, oil and gas as well as liquefied natural gas or LNG. These are niches in which we have a sustained differentiated advantage and are currently buoyed by energy transition trends.

Delving deeper into environmental matters. Many of our customers have stated carbon emission reduction targets, such as reaching net zero global carbon dioxide emissions and are increasingly looking for energy-efficient solutions to reach these objectives. Velan is directly aligned with this secular growth as we have dedicated significant resources to environmentally driven solutions for many decades.

We're particularly heartened by evolving sentiment for marine nuclear power as it's critical to reducing greenhouse gas emissions due to its clean properties, namely zero emissions and fully recyclable. Two recent landmark events, the COP28 Climate Change Conference and the Nuclear Energy Summit, heralded a new era of cooperation to include nuclear energy sites of renewables to reach that zero emission objective.

Now at Velan our valves power the power industry's choice for reliable nuclear service boasting significant installed base of nuclear powered reactors worldwide, over 50 years of uninterrupted experience. We are the leading valve supplier for all nuclear reactor technologies in the valve space, our expertise can be leveraged into smaller and into small modular reactors or SMRs which are increasingly gaining traction due to their reduced footprint, savings on cost and construction time and greater safety. Velan's long-standing experience in defense markets, particularly nuclear ferry and aircraft carrier propulsion provides us with a leg up on the competition.

For example, given tight space considerations, marine reactors must be physically smaller, generate higher power per unit space than land-based reactors, valves thus does subject to greater stress and must endure harsher conditions at sea, in short, our position in defense markets makes us the ideal supplier for the growing SMR niche. As for oil and gas, it's been widely affected by global efforts to mitigate climate change and protect the environment.

Accordingly, we intend to leverage our extensive customer base, which includes most North American refineries as well as a growing presence overseas by providing engineered valves and steam traps that are most reliable. Likewise Velan offers the most complete and technically advanced product launch for LNG, is the cleanest of all fossil fuels producing 40% less CO2 than coal and 30% less than oil.

Please turn to Slide 7. The solid underlying fundamentals were well positioned to drive sales and cash flow overall. The $4 million in cash flow from operating activities reported in fiscal 2024 understates our potential. From our operational standpoint we've implemented a series of actions to drive cash at leveraging the full scale of our business, maximize the strategic procurement advantages and importantly, optimizing our inventory management.

Improving our cash flow will bolster an already solid financial position for the company. We closed fiscal 2024 with a positive net cash position, providing the company with a distinct advantage in a high interest rate environment. Given its advantage, we're on solid ground to actively seek growth opportunities to further expand our reach in new market niches and consolidate our leadership in existing ones.

Given my dual role as Chairman and CEO, a position on our Board of Directors was left vacant. I'm very pleased to report that Daniel Desjardins has recently been appointed to our Board as an independent director, anyhow he is an accomplished business lawyer and executive with extensive expertise in business law, clients and risk management, as well as decades of experience in financing complex mergers and acquisitions at Bombardier, his legal and business acumen along with outstanding knowledge of global markets nicely complement the skill set of the Board, certainly look forward to his contributions going forward.

In closing, I'm very thankful for leading such a high-quality leadership team here at Velan through the collective contribution of our leaders, along with the tireless work of more than 1,600 employees worldwide. Our brand remains revered throughout the industry.

Consequently, I'd like to take this opportunity to sincerely thank our employees for their dedication and resilience during what can at best be described as an unusual year from which we are now truly rebounding.

At this point, I'll turn the call over to Rishi for a financial review. Rishi?

[Rishi Sharma, executive]

Thank you, Jim. If you could please turn to Slide 9. Velan concluded fiscal 2024 with solid fourth quarter results. Strong bookings also raised the value of our backlog to $491.5 million at year-end, representing a sequential increase of $6.5 million since the third quarter and more than $27 million over the course of the year. .

Fourth quarter bookings amounted to $132.8 million, up sequentially $78.3 million in the third quarter. Our Italian operations recorded very strong orders from the oil and gas sector and we also recorded higher orders at our North American operations. These were partially offset by the timing of orders in France that followed strong bookings in last year's quarter.

The book-to-bill ratio for the quarter was 1.13. For the year, the ratio was 1.08, which represents the best performance in over 2 years when considering rolling 12-month bookings and sales, as shown at the bottom graph of the slide.

Turning over to the income statement on Slide 10. Fourth quarter sales reached $117.9 million, up from $115 million a year ago. The increase mainly reflects strong shipments from our international operations, particularly in Italy and China. A stronger euro average rate against the U.S. dollar also had a $1.7 million positive impact on sales.

These factors were partially offset by lower shipments from the North American operations and delays caused by the political tensions in the Middle East, which affected shipping traffic in the Red Sea.

Moving on to Slide 11, which shows gross profit $38.4 million compared to $39.9 million last year. This decrease is mainly due to a less favorable mix this year compared to last, reflecting the execution of certain low-margin projects during the quarter.

Last year's gross profit also benefited from a favorable revaluation of the inventory provision. As a percentage of sales, gross profit was 26.9% compared to 30.4% last year. Administrative costs were $33.1 million this year versus $80.8 million last year. However, asbestos-related provisions materially affect the comparability between the periods. We periodically estimate the impact of future asbestos settlement claims. In the past, the provision only reflected known claims. But following an actuarial study, we took $56 million provision in the fourth quarter of fiscal 2023 to also reflect future claims not yet claimed.

In this year's fourth quarter, we made an additional $10 million adjustment to true up the provision based on the latest estimates of amounts that may be paid. Excluding these provisions as well as restructuring costs, administration costs amounted to $21.7 million or 18.4% of sales in the fourth quarter of fiscal 2024, down from $24.9 million or 21.6% of sales last year.

The improvement is mainly due to lower expenses in our North American operations and cost reduction initiatives throughout the world. EBITDA was $8.5 million for the fourth quarter of fiscal 2024 compared to negative $39.5 million last year. Excluding the provisions and restructuring charges, adjusted EBITDA stood at $19.9 million, up from $16.5 million last year.

Net loss totaled $2.1 million or $0.10 per share compared to a net loss of $47.2 million or $2.18 per share a year ago. Excluding the after-tax affected provisions and restructuring expenses, adjusted net income was $8.9 million or $0.41 per share, up slightly from $8.8 million last year.

Moving on to cash flows on Slide 12. Cash provided by operating activities was $19.6 million in the fourth quarter of 2024, up from $18.5 million last year. The increase is attributable to higher EBITDA and positive changes in noncash working capital movements partially offset by an unfavorable movement in long-term provisions.

Finally, our financial position remains very soft. As of February 29, 2024, cash and cash equivalents stood at $36.4 million and we also had $5.3 million in short-term investments as opposed to $28.8 million in total.

We believe our strong liquidity position, along with future cash flows generated from operations provides Velan with the flexibility to meet its financial obligations and projected working capital requirements while continuing to execute its business strategy and seek profitable growth opportunities to further expand its global reach.

In conclusion, on Slide 13, given our solid order backlog, of which nearly 3/4 should be delivered over the next 12 months, we expect fiscal 2025 annual sales to exceed those of fiscal 2024.

I would now like to turn the call over to the operator for the Q&A session.

[Operator]

[Operator Instructions]

Your first question comes from Alessandro Ciarnelli with SM Investors.

[Alessandro Ciarnelli, analyst]

I have 2 questions, if I may, so the backlog, that's a green number. I'm just wondering, since you're talking about gross margin, the mix was a bit negative, not a negative, sorry, but a little bit lower than last year, how is the backlog mix in terms of gross margin. How do you see that one and then tied to that, how is the MRO business penetration within the backlog?

[James Mannebach, executive]

Yes. Yes. The MRO within the backlog specifically. Let's turn our attention first to your question about profitability in the backlog. It's the way we track the profitability of the backlog, it's in line with our historic averages. Perhaps -- actually Rishi commented on it.

In the fourth quarter, we cleared some shipments that had historically lower profit margins than what we've seen. So we expect this, as I said, as we look at the backlog that we should be in good shape in terms of profit and backlog. MRO in general has been slow throughout '24. But now we're speaking more specifically on the U.S. market. We've seen a rebound towards the end of the fourth quarter and continued strength in the first quarter. So we do see hopefully we've reached the bottom of the destocking programs that affected many companies, not just ours and the street and our channel partners are replenishing their position.

So we're seeing strength in MRO, as I said through in the fourth quarter and certainly into the first quarter.

[Alessandro Ciarnelli, analyst]

You spoke about the nuclear opportunity, lot of talk about nuclear tied to data centers to the electrification in general. How do you see this long-term opportunity? My understanding, if I remember correctly from an article that I read you guys provide the majority, actually, you can provide the majority of the valves that go into the core of a reactor. So assuming there's a huge demand, are you able to fulfill that?

[James Mannebach, executive]

It's a great question. I commented in my remarks about our global footprint. If we turn to operations in France, outside of Paris as well as Lyon. I was just over there a couple of weeks ago and reviewed the capacity directly related to your question, coincidentally, and we're comfortable that the growth that we see on the horizon through key customer in France, we'll be able to match that growth with our capacity.

In Canada and the U.S., we have significant capacity in our operations here to absorb that growth that you speak of. Keep in mind also that with nuclear, the delivery times from the time, let's say, you see the order to the time you're actually shipping are quite extended compared to the rest of our order and backlog.

And so what that does is gives us an opportunity to more effectively and efficiently plan capacity and identify capacity constraints as we go forward. So we feel very comfortable we'll be able to meet demand, then as you rightly put, we're in a very, very good position to enjoy the growth that we see escalating in the coming years.

[Alessandro Ciarnelli, analyst]

I read the article that was posted on your website from Valve World, very interesting. There's a reference to a joint -- to a possible joint venture, actually to a joint venture in the Middle East. How would that work? How you accounted for on your financial statements, CapEx.

[James Mannebach, executive]

Rishi, why don't you talk about the accounting of the joint venture?

[Rishi Sharma, executive]

Yes. So it's a joint venture out of our Italian operations with a partner in Saudi Arabia. We own 60%, partners 40%, with control. We would be consolidating those results into our Italian operations and then upwards, and upstream into Velan Inc.

[James Mannebach, executive]

As you probably know, in the Middle East, and it's not unique, I guess, in that part of the world. More and more of the countries that are requiring some kind of local presence for suppliers such as us, and we're happy to have a good -- very good joint venture partner. We're in the final stages of qualification of the operations in fact some good growth to develop from our presence with that joint venture. It may not be the only one that we entered into in the coming years to address the market demands.

[Alessandro Ciarnelli, analyst]

Then if I may go on with questions. It was in the article that you're talking about the opportunity of industrial Internet of Things, out of it with monitoring the core valve with the V-flange, if you want to give any other color how do you see that opportunity.

[James Mannebach, executive]

So the V-flange specifically has been developed in our ABB operation, Italy. It's a very clever innovation like I should say, and then most of the valves, if you think about the deployment in oil and gas or any kind of process, most of the valves are monitored. They're on/off valves often, mechanical valves that the operator owner doesn't really have visibility to developing problems with the valves or how they're functioning or even up or downstream activities that may affect their overall process, the V-flange addressed this by pulling vital information out of the valve just based on its performance under these.

So we're excited about that. We think we'll launch into the market in this coming fiscal year, actually. So we're in a good position, I think, to exploit the developing demand for smart valves, which has been talked about for many, many years. And I think the technology as it continues to improve enables its advances much more effectively and efficiently than perhaps the vision of the past is not reality of the future. So we're very pleased with this development and look forward to exploit in that marketplace and improving our presence with our customers.

[Alessandro Ciarnelli, analyst]

And I'll go, just one second, the asbestos, the number, that is a gross number? I know it's an estimate and understand the different variables that go into an estimate and might change. But is there an assurance attached to that, that will make your payouts lower?

[Rishi Sharma, executive]

So in the financial statements, essentially in the cash flow section on the notes, you'll see that there was $9.5 million paid for indemnity, which is real settlement severed, which is the long-term provision. Within our SG&A costs, we have about $4.5 million of legal, the $10 million adjustment was to the long-term provision itself. So that's a noncash adjustment, and the estimate there is really based on a series of variables and hypotheses that indicate that over the term of this liability existing, there will be about $10 million more that will need to be paid out.

[James Mannebach, executive]

Yes. And I think it's important, Rishi, to underscore that last point. The adjustment or true-up of the reserve at the end of the year based on the latest actuaries of fatalities, the runoff of decades into the future. So I think that when we booked the reserve that Rishi talked about around $50 million last year, it gives us more predictability and stability in our earnings. But you're still going to see these annual true-ups, but you have to keep in mind in terms of your question about the actual cash burn, you're trying to project things that are going to happen 30 years into the future.

So there's some variability given the movement of the underlying assumptions, so you should expect that going forward. But I think on balance, the booking the reserve to the balance sheet will give us as Rishi said a more stability and predictability in earnings over the long run.

[Alessandro Ciarnelli, analyst]

And there was that little situation with the mortgage, which I understand is already reversed. Just wondering how that works in the sense, why don't you just pay it down if you have the cash? Or just does it make sense, you want the cash, the working capital, et cetera?

[Rishi Sharma, executive]

Yes. So I think you're referring to the asset-backed mortgage. I mean, the rates are very favorable for us over a very long horizon. I think those take us up to 2034, or '36. And in terms, as you mentioned, the compliance, we're in compliance. We have the alignment with the lender. It's a very short-term thing, and basically in our Q1 results, which we'll be getting ready for in the next 2 weeks, that portion of the long-term debt that was classified to short term will be put back to long term. So they're mechanical. There's no issue there.

The cash that we have on hand of 36.5 plus, call it, the 5.4% of short-term investments for us to purpose the use of that liquidity is where really the working capital and reinvesting in the business for some of the growth strategies that Jim spoke about.

[Alessandro Ciarnelli, analyst]

And my last one is more on, for family reasons I am in Montreal often, would you guys be open for me to come and visit and sit down with you guys to understand even better, your company, if I reach out beforehand?

[James Mannebach, executive]

Well, we're always pleased to entertain visitors, quite proud of the operations. So yes, we can organize the calendar, we'd be delighted.

[Alessandro Ciarnelli, analyst]

I see it on the website, there is a phone number and e-mail, should I just reach out through those two.

[Rishi Sharma, executive]

Yes. Just call me and we'll arrange this.

[Operator]

[Operator Instructions]

I will now turn the conference over to Jim Mannebach. Please go ahead.

[James Mannebach, executive]

Thank you. We appreciate you all for joining us today. I hope the Canadians on the call had a wonderful holiday weekend, and we look forward to sharing our first quarter results with you for fiscal 2025 in July. Have a great day. Thanks again.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.