CA - Velan Inc. (VLNSF) Q2 2024 Earnings Call Transcript

2023-10-06 13:25:02 ET

Velan Inc. (VLNSF)

Q2 2024 Earnings Conference Call

October 06, 2023, 11:00 AM ET

Company Participants

Bruno Carbonaro - Chief Executive Officer and President

Rishi Sharma - Chief Financial Officer

Conference Call Participants

Stephen Takacsy - Lester Asset Management

Presentation

Operator

[Foreign Language] Greetings and welcome to the Velan Inc. Q2 of Fiscal Year 2024 Financial Results Conference Call.

[Foreign Language] During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Friday, October 6th, 2023.

[Foreign Language] I would now like to turn the conference over now to Rishi Sharma, Chief Financial Officer.

[Foreign Language] Please go right ahead.

Rishi Sharma

Thank you. [Foreign Language]

Hello, everyone. Thank you for joining our conference call. Let's start by discussing the disclaimer from our Investor Relations presentation which is now available on our website in the investor relations section.

As always, the first section mentions that the presentation provides an analysis of our consolidated results for the quarter ended August 31st, 2023. The Board of Directors approved these results yesterday, October 5th, 2023. The second paragraph refers to non-IFRS and supplementary financial measures, which are defined and reconciled at the end of this presentation.

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

I will now pass it over to Bruno Carbonaro, CEO of Velan.

Bruno Carbonaro

Thanks, Rishi, and hello, everyone. So now we will report our key highlights for the second quarter of our fiscal year 2024. First of all, we report sales of $80.3 million, which is an improvement of about 20% versus the Q1 of the year and the mild decrease of $4.7 million or 5.6% versus the second quarter of last year.

It translated to a $3 million EBITDA, which is $1.6 million higher than the EBITDA reported on the second quarter of last fiscal year. Most of the explanation is due to the change where we account for our asbestos liability.

But we need to notice that with $5 million less revenues than one year before, we can report, without the same EBITDA when normalized for the asbestos cost, which means that we were serious about maintaining our margin at a high level.

These translates into a $2.1 million net loss for the quarter. We were able also to maintain our backlog at a high level at $485.7 million. It's an increase since the beginning of the year of $21.3 million partially explained by the revision of the foreign exchange between euro and dollar cumulative value. We enjoy a very nice cash position on our balance sheet. We have a very robust balance sheet.

We have a net cash position of $39.4 million at the end of the quarter, despite a decrease of $19.3 million during the quarter due to the preparation for the budgeted ramp up of our operations in Q3 and Q4 of the year.

Last but not least, I wanted to share with you the fact that as a result of Flowserve not obtaining the required regulatory approvals for France related to the acquisition of Velan, they have informed the company that they intend to terminate the arrangement agreement on October 7th this year.

I now pass on back the mic to Rishi to navigate you on some specifics of the quarter.

Rishi Sharma

[Foreign Language] Thank you, Bruno, and hello again everyone. I'll quickly start by saying indeed, a disappointing outcome to the intended transaction and as we all very well know, these things are never closed until they are.

We are very thankful to our teams who worked tirelessly on the transaction as well as managing our day-to-day business, ensuring quality and timely deliveries to our customers. We will now only look forward and not back.

Our focus going forward remains fully on executing our strong backlog of $485.7 million, of which $339 million is shippable in the next 12 months, giving us comfort on our projected revenue streams.

The total backlog increased by $21.3 million or 4.6% since the beginning of the fiscal year. The increase in backlog is primarily attributable to changes in the profile of scheduled backlog shipment dates.

Our book-to-bill ratio of 1.1 for the half year was driven in part by changes to the profile of the backlog delivery dates as well as the securing of $71.5 million of new orders in the second quarter or $163 million year-to-date.

We continue to see stability in the Euro to USD spot rate, which resulted in a positive revaluation of our strong Euro denominated backlog by $6.5 million. Now we will look at our sales.

Sales amounted to $80.3 million for the quarter, decreasing by $4.7 million or 5.6% compared to the same quarter last year. However, an increase of approximately $13 million or 18.6% from the first quarter in the current fiscal year.

If we compare the year-over-year decrease in sales, it is primarily attributable to lower shipments of large orders by our Italian operations due to a reduction of these orders booked in the previous fiscal year.

The decrease in sales for the quarter was also caused by delays on certain shipments caused by customer readiness issues. Otherwise, the decrease was partially offset by the positive impact and the strengthening of the euro average rate against the US dollar on sales, which amounted to $2.1 million for the quarter compared to the last fiscal year.

Finally, sales for the quarter were also positively impacted by favorable revaluations of our provisions for performance guarantees, which are no longer payable and volume rebate accruals.

We will now look at profitability. EBITDA amounted to $3 million or $0.14 per share compared to $1.4 million or $0.06 per share last year and also an increase of approximately $6.8 million compared to the first quarter of the current fiscal year.

The favorable movement in EBITDA for the quarter is primarily attributable to a decrease in administration costs, partially offset by an increase in other expenses. If we look at administration costs, they amounted to $22.6 million for the quarter, a decrease of $2.1 million or 8.5%.

The decrease in cost for the quarter is primarily attributable to the recording in the last quarter of the previous fiscal year of an asbestos provision related to potential settlement values of future unknown claims. The settlement expense amounted to $3.1 million in the second quarter of fiscal 2023.

A decrease in administration costs for the quarter is also lower due to outbound freight costs, which have now stabilized and sales commissions in relation to the lower sales volume. Finally, the decrease in the quarter was partially offset by a general increase in admin costs. The increase in other expenses is mainly due to an adjustment of a provision related to logistic costs.

Gross profit for the year was relatively stable at $23.5 million versus $23.4 million, but the gross profit percentage improved by 150 basis points from 27.6% to 29.1%, which highlights our continued focus on strong execution of our backlog and the efficiency initiatives related to cost control.

On the absolute value of gross profit, the slight decrease in gross profit for the quarter is primarily due to the lower sales volume, which impacted the absorption of fixed production overhead costs as well as the unfavorable unrealized foreign exchange translations related to the fluctuation of the US dollar against the euro and the Canadian dollar when compared to similar movements from the previous year. The decrease in gross profit for the quarter was offset by an improved product mix as well as favorable revaluations of our provisions for performance guarantees and volume rebates.

We will now move to cash and liquidity. To start, our net cash and overall liquidity position remains strong at $39.4 million and $122 million, respectively. Our net cost did decrease by $19.3 million since the beginning of the quarter, driven mostly by a free cash flow usage of $22.8 million. The unfavorable movement in cash used by operating activities for the quarter is primarily attributable to unfavorable movements in noncash working capital items, partially offset by an increase in EBITDA.

The negative noncash working capital item movements for the quarter ended August 31st, 2023, consisted primarily of an increase in accounts receivable, primarily due to the higher proportion of sales that occurred later in the quarter, an increase in inventories in reaction to the delivery schedule of certain large orders and a decrease in AP and accrued liabilities due to the timing of payments primarily related to the previously purchased inventories for ongoing and future expansions. With the current working capital profile, the company is now preparing for its projected ramp up in Q3 and Q4.

I will now pass it back to Bruno for his closing comments before we move to the Q&A session. Thank you.

Bruno Carbonaro

Thanks, Rishi. A couple of comments before opening the floor for questions. We show at the second quarter of fiscal year '24 an improvement versus not only the Q1 of the year but also in terms of results of the Q2 of last year. We are now fully focused on the ramp up that has been [indiscernible] for the second half of the year. We will continue to manage our business prudently as an independent company.

So our main focus on executing the backlog of $486 million, at the same time as we are working on a strong pipeline for commercial opportunity. It will also be very disciplined in the way we are managing our working cap with an increased provision of cash on our consumables and reducing inventory due to the increasing shipments.

We see a lot of new opportunities in new markets for our North American commercial operations at the same time as there is a confirmed growth of legal business in France. Finally, I should say that we are extremely disappointed by the outcome of the infinite transaction and exposure. And it's time for us now to revisit our corporate strategy to ensure that we can maximize the value creation for the shareholders.

I now open the floor to questions.

Question-and-Answer Session

Operator

[Foreign Language] [Operator Instructions]

[Foreign Language] And the first question comes from the line of Stephen Takacsy, Lester Asset Management. Go ahead.

Stephen Takacsy

Yes. Hi, Bruno, Rishi. Yes, a very disappointing outcome, I know partly beyond your control. So I gather that there will be other alternatives to look at to maximize shareholder value. Can you sort of give us an idea of why the transaction was blocked by the French government? And what sort of strategy going forward the company might pursue to maximize shareholder value? And if in the meantime, a share buyback, it wouldn't be a smart thing to do?

Rishi Sharma

Yes. Hi, Stephen. So on the first question for full clarity, Flowserve obviously was the lead for obtaining all regulatory approvals. It was their filing with the French government managed with our support. As communicated by the representative of the French ministry today and yesterday, there were certain risks that the French government understood would come with the transaction that Flowserve taking over. And their response was that those risks were not fully addressed. And that's the most I can say about the feedback hat we've seen from the French Minister of Economies office. Two, absolutely. I mean, we are removing. We're going to look at what other strategies we have. I think we need to focus on the business fundamentals. Close to $500 million backlog is still very solid and stable for us. We have a lot of opportunities in the pipeline for bids. So our strategy is going to focus around refocusing our attention on the business, the execution and some of the opportunities we have there. Three, share buyback, subject to Board approvals and then looking at the different options, I think everything well and could be considered. At this time, we have nothing to confirm or to communicate that is immediate plan. Bearing in mind that the announcement of the transaction being refused was just yesterday.

Stephen Takacsy

But I gather the -- can you just give us some color on how big the French operations are? Segault, I know they own 75% and correct me if I'm wrong. And the family or the employees own the other 25% or the founder. So was it strictly that operation that was the objection and how big of a division or a subsidiary is that in the scheme of the whole company?

Rishi Sharma

Yes. So first on the Segault minority interest, as part of our subsequent event notes in the financial statements, you'll see that we repurchased the 25% minority stake. So that transaction was closed post Q2 closing. So Velan is now 100% equity owner of the Segault business. Two, if you look on the presentation of our -- on the investor presentation, you'll see that the French business in total represents 1/4, 30% of the overall business of Velan Inc., and that fluctuates from quarter-to-quarter depending on the timing of delivery. So it's about 25% to 30% when we look at the total.

Stephen Takacsy

Of the top line?

Rishi Sharma

The top line, yes.

Stephen Takacsy

Okay. And so what was the purchase price of the 25%? What sort of multiple was paid on that?

Rishi Sharma

So if you recall, it was not multiple based. It was based on an agreement in place on the acquisition of Segault by Velan and it was equity movement, so book value movements that gained a total purchase price of 25% to about EUR4.6 million I believe. So the valuation on Segault based on that approach, book value approach variations I would say.

Stephen Takacsy

So it wasn't based really on results?

Rishi Sharma

No. Well I mean the equity value that moved through historical results, yes, but future multiples and all that [indiscernible].

Stephen Takacsy

Okay. And when was that buyout complete exactly?

Rishi Sharma

I believe it was September 10th or 18th?

Bruno Carbonaro

Yes.

Rishi Sharma

We had announced it in Q1 as a subsequent event that the option was exercised. The production was exercised for us to buy back the stake and it was closed basically 15 days ago, so on the 18th of September.

Stephen Takacsy

Right, okay. So was that option exercised in the context of trying to get a deal done?

Rishi Sharma

No, I think, this is unrelated.

Stephen Takacsy

Sorry?

Rishi Sharma

Unrelated.

Stephen Takacsy

Unrelated. Okay. And did you disclose the price for the amount for the 25%?

Rishi Sharma

Yes. It's in the notes. It's in the subsequent event notes to our financial. I think it's all the way at the end [indiscernible] 20 years or something like that.

Stephen Takacsy

Okay. All right. So but I gather the French government has no objection to that Velan still controlling it. It was more an American thing, if I understood correctly?

Rishi Sharma

Yes. Again, we control SAS. We control Segault. The Flowserve application was rejected. So I only know --

Stephen Takacsy

There were rumors at one point that private equity was looking at buying Segault. Is there an attempt to sell it on a separate basis to the highest bidder? Obviously would have to be a French company.

Rishi Sharma

I don't think we're there yet. I mean like we discussed just earlier, when we look at the strategy for growth and maximizing value, say anything to come back on the table but or present itself on the table. I won't comment on that.

Stephen Takacsy

Right, right. So I gather, so the emphasis is obviously a focus on continuing to improve the operations and the margins et cetera, et cetera and also possibly look at other ways of maximizing shareholder value should they present themselves.

Rishi Sharma

Yes. You know one thing I'll add is when you go through the due diligence its comprehensive as we did like as we disclosed in the circular, learn also a lot about the company and where there's opportunities to improve and become more efficient. The direction and the objective obviously was a close transaction. That didn't work. So now we can take a lot of what we learned about the company and try to put actions in place to be better.

Stephen Takacsy

Right, right. Okay. All right. Thank you very much.

Rishi Sharma

Thank you.

Bruno Carbonaro

Thanks.

Operator

Thank you. [Foreign Language] [Operator Instructions]

[Foreign Language] We have no more questions on the line, so thank you very much. That does conclude the conference call for today. We thank you for your participation. We ask that you please disconnect your lines and have a great day, everyone.

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