Velan Inc. (VLN) Earnings Call Transcript & Summary

The next item of business is the approval of unallocated options under the option plan. The resolution set forth was included as schedule a to the Notice of Meeting. May I have a motion with respect to the resolution to approve the unallocated options under the option plan?

Mr. Chairman, I move that the resolution approving the unallocated options under the option plan be ratified and confirmed.

Thank you. May I have a seconder?

Mr. Chairman, I second the motion.

Thank you. Is there any discussion on the matter? If you have any questions, please submit them now. If there is no discussion, I now call for a vote on the motion. Please submit your vote now. Thank you for voting. [Voting]

The next item of business is the ratification, confirmation and approval of amendments to the bylaws of the corporation. The resolution containing the proposed changes was included in the Notice of Meeting. The amendments allow the corporation to hold annual meetings entirely by telephonic, electronic or other communication facility, such as we are doing today. May I have a motion with respect to the amendments to the bylaws?

Mr. Chairman, I move that the resolution ratifying, confirming and approving amendments to the bylaws of the corporation be adopted.

Thank you. May I have a seconder?

Mr. Chairman, I second the motion.

Thank you. Is there any discussion on the matter? If you have any questions, please submit them now. If there's no discussion, I now call for a vote on the motion. Please submit your vote now. [Voting]

This concludes the formal business of the meeting. Polls for all the items of business, other than the election of directors will now close. Following the CEO's address, the scrutineer will have completed its tally of the votes and will present the results. I would now propose to ask our CEO, Yves Leduc, to provide an overview of our corporation's business since the beginning of the last fiscal year.

Thank you, Tom, and thank you for all of you, shareholders and guests, attending this first virtual meeting in the history of the company. I will be speaking both in French and English, and be presenting you a shorter version of a presentation that will be uploaded on our website next week, so you'll have an opportunity to go into further detail of a summary of what was a very exciting, intensive and filled year. I would say it's a milestone year, and we can start right away with the presentation with the first slide, please. So 2020 is the 70th anniversary of the company. [Foreign Language] And as we deployed V20 over the year, the benefits starting to come up, and we were able to deliver improved adjusted results despite a very slow start. If you remember a year ago, we had a very difficult Q1 to report. Once again, our operations stood out, and I was saying to a colleague of mine in February while seeing blue skies after a few years of a difficult industry environment. And then suddenly, we were hit by COVID-19. So I would say that we reacted, as you'll see, very swiftly to COVID-19, but we also have the benefits of a company that is in transformation right now and going in the right direction. And as a result of the moves that were made in the last year or 2, we're prepared for this economic shock. We're much more resilient and much more agile than we were before. So what I suggest is to jump into it with the next slide, please. This is our Chairman, Tom Velan, addressing our shareholders in our annual report and starting by mentioning that we are celebrating our 70th anniversary. I think the history of the company is a fantastic story of an entrepreneur immigrating to Québec, and building a global company that has had a footprint now in every market of the world. If we move to the next slide. A recent article in Valve World Magazine has been written up with lots of pictures. And Tom talks extremely eloquently of what made the company such a success. We've developed products for critical services. We've had strategic alliances with very prestigious organizations. And we are relied upon as a supplier of valves for very, very difficult applications. [Foreign Language] Next slide, please. Significant changes in the business model came with also notable changes in our group of leaders. [Foreign Language] Next slide, please. So let's talk about fiscal '20. Our results were -- if you can go to the next slide, announced back in May. I'll talk about fiscal '20, although the world and most of our guests and shareholders listening in know what the year looked like, and then talk briefly about our Q1 results. So in terms of sales, basically flat with fiscal '19, just a little higher, 1.3%. And you see that our bookings and backlog had also remained fairly steady. Next slide, please. In terms of how our sales balance across regions, they're actually quite balanced. And the geographic balance is actually also mirrored by a very balanced business portfolio. And I'll be saying a few words about the 5 strategic businesses that we operate. But as you see, the U.S. remained a very strong market for us. Canada remains fairly small at 10% compared to what it was 5, 6 years ago when the price of oil was in the $125 and Western Canada was very, very dynamic, market for us at the time. Now it's a lot more stable, around 10%. But you see that we're very strong in Europe. And in Southeast Asia, we're benefiting from excellent bookings, record bookings from our Italian operations. [Technical Difficulty] Shortly interrupted. So I was talking about our balanced portfolio and balanced business across several geographies. Next slide, please. Results look like this. If you look at the blue bar, these are our net earnings, but the 2020 net earnings were affected by non-cash tax adjustments of $8.2 million and also the money spent in driving our V20 efforts. If you look at the orange bar, you see that on an adjusted basis, we're driving for 3 straight years, quite notable improvements in our performance that are explained largely by reduced administration costs, where we're reducing our overhead, we're improving our margins and also the benefits of V20, which I'll be talking about, are kicking in. Next slide, please. This is our global footprint. If you click one more step, you'll see that plant 2/7, which was announced a year ago to be the plant we've decided to close to consolidate our activities in the 3 remaining North American plants, the fact of the matter is that we're ahead of our plan, and we'll be able to shut down operations in plant 2/7 several months before it was planned. And that also obviously will bring additional overhead reduction benefits earlier than planned. So we're going to have a very strong global footprint, and that move obviously allows us to maximize our remaining capacity in North America, and I'll be talking about our manufacturing strategy going forward in a few minutes. Next slide, please. Total equity of $284 million, that's the equivalent of $18.13 per share. And I want to point out here that trading at less than USD 6 -- CAD 6, we believe that our stock is significantly undervalued. Total assets, net cash, total long-term debt, cash evolved nicely this year because of our efforts in managing cash from operations. Next slide. [Foreign Language] Next slide, please. If you look at our bookings, you see that they've gone down after a good surge at the end of last year, in the last few months. But that is largely due to the fact that we're seeing 1 of our 5 strategic business areas hit quite hardly by the current crisis. Distributors are ordering far fewer valves right now. In fact, they're not stocking up in anticipation of a crisis that might go on in the oil -- oil price driving that crisis being very low still. So you're seeing the MRO business has actually been on a steady decline for the last few months. And that has -- that's a big part of our business. And that has influenced the trend -- the global trend that you're seeing. But the truth of the matter is that we have areas of our business, namely nuclear, severe service, project manufacturing, which are still seeing healthy booking activities, and that's a reflection of what I referred to earlier as a very healthy, resilient, balanced business portfolio. Moving on, please. We've taken a lot of actions to strengthen our balance sheet. We have a cash action plan. The V20 initiative is driving a lot of margin improvements and reduction of the cost. And the latest news that we confirmed on Monday is the securing of a $22.5 million asset mortgage loan from BDC plus an extended line of credit, $65 million to finance our working capital. We believe we will not have to draw on that facility to its maximum extent. But the good news is we have it now, and that provides us with a lot of resilience in the face of an uncertain economic environment. Moving on, please. Our response to COVID-19, I'm quite proud of -- if you move to the next slide, of how the whole organization reacted. And it's remarkable to see that our global footprint almost matches the itinerary of the virus, with a plant in China, 2 in Korea, 2 in Northern Italy -- 1 in Northern Italy and -- we're in France. Northern Italy, as I said. Portugal. I mentioned India, 3 plants in Canada and 1 in the U.S. So the good news, if you move to the next slide is, that we've been seeing the crisis come probably earlier than most companies, and that as a result, we're able to react extremely swiftly, deploying and allowing work from home for pretty much every staff employee in the company, and continue our operations with a strict -- necessary personnel in the plants. Establishing social distancing, sanitary measures. There's no book that was written on how to manage manufacturing operations in the midst of a pandemic. So I think we're learning very fast. And we've been quite fortunate so far, probably as a result of a bit of luck, but also all the good actions that we've implemented of having had no infections yet in our operations. So that's -- we're knocking on wood, but I'm very proud of how fast we were able to react. We've kept in touch with our employees. I hold a weekly video with all of our employees with Bruno stepping in here and then. So we're in touch with our employees. We're getting feedback from them. We're tracking their mood, their -- and how they face from their home when they're working from home, the -- a difficult environment. And overall, I think we're faring very well. And as a result of all that, we've been able to manage our supply chain by mitigating the impact of the lockdown in India and the travel restrictions, obviously. So overall, I would say, and if you can see from the next 2 slides, pictures of a very dynamic company stepping up and reacting to a very, very difficult crisis. You see a picture of me on the top left side, that's my weekly video recorded from home. China sent out -- our Chinese operation sent out masks to the rest of our operations that we've been giving to local hospitals. On the next slide, you can see that the distribution of the Velan logo mask made some kids very happy and some families here in Québec. And you can see that we've written up the protocols and deployed them across our plants worldwide. And we have a sharing of best practices that has never reached a level like that and a level of cooperation which I think help us manage through this crisis. We can move on, please. [Foreign Language] The next slide. [Foreign Language] The primary increase the focus on our customers. What did we do here? This is really about reorganizing around 5 strategic businesses, 2 of them already existed, namely France, nuclear and upstream, midstream for Italy. In our North American operations, were reorganized around project manufacturing, severe service and MRO. As a result of that, there's a lot more focus on market development on the end-user customer. We've seen, in the course of the last 18 months, our severe service and project manufacturing bookings go up quite nicely. Under the leadership of Rob Velan, MRO is opening new channels in Europe. Italy, as I said, recorded the highest bookings ever last year. That's the result of 2, 3 years of really changing the way they attack the market. And the nuclear business, led by our French operations, is bolstering its market leadership. The second lever was the reorganizing of our manufacturing footprint. What we did there is basically planned on closing 1 of our 4 plants. And making the 3 remaining North American plants more specialized manufacturing centers. So Granby is going to be focusing on multiturn valves. It becomes a center of gravity for the project manufacturing business. Montreal plant 1/5 will be focusing on quarter-turn valves and will become the core of our severe service business. We're closing plant 2/7. Williston becomes a center of excellence for nuclear and navy valves. But it will also be producing multi-turn valves to complement Granby. India, Portugal, Korea, Taiwan will be producing an increasing share of our commodity valves as we transfer a lot of the small forge valves to India. And the China plant is actually now being leveraged by the Italian business and becomes a low-cost API 6D valve manufacturer as well for the upstream midstream business. A leaner, faster production model, what does that mean? It means that we're reducing our dependency on in-house machining, and we're creating production cells, and we're keeping in-house only what is strategic machining, leveraging an existing global supplier network where we're asking them to take on more pre-machining. That's going on very well. We're on track here. In other words, we're making our business simpler to manage and more focused. And don't forget that we're having more specialized manufacturing centers. And that basically will help create a model that is a lot more agile. The fourth lever is transferring our commodity products to lower-cost sites. So India is taking a much greater share and will be growing as a result of getting the smaller valves we're producing here, small forge valves, and that's on track as well. And the last one, and I would move to the next slide, modernizing our systems and processes. You have our Velan business function map that we've set out 2, 3 years ago. And against that function map, we've identified systems, starting with our -- the redeployment of a renewed ERP system 3 years ago. VPM, IPPC, CPQ, lots of acronyms, and I can go on, but they all have to do with supporting important critical functions and processes in our company. VPM is Velan Project Management, and we are seeing dramatic improvements in delivery performance, and they're being noticed by our customers. So the modernizing of our processes did not start a year ago. It was really 3 years ago, but it is part of V20 transformation. Next slide, please. So just quickly, key market highlights. On the uploaded version of this presentation, you'll see a lot more details. But if I can steam through and go through each of our 5 strategic businesses. MRO aftermarkets, projects, severe service and Navy, as you can see here and then nuclear and special applications with manufacturing centers being not only in France but also Williston, and the upstream midstream oil and gas business that's centered in Italy. So let's start with the project business, I'll give you one example of a major breakthrough. We're back in power, I would say, because we had lost a bit of steam, no pun intended, in the power business. You can move on to the next slide. [Foreign Language] Florida Power & Light. So that $15.7 million, actually the value of a contract that we have to supply them with valves and support them in their maintenance efforts. That's a really interesting breakthrough because the valves we will supply to Florida Power & Light will actually replace also competitors' valves. Next one. Severe service and Navy, lots of movement happening there. To begin with, if you can click, we're maintaining our strong position in coker ball valves in refinery. That's the decoking sector of refineries, and we're getting a lot of orders and very well established in China, as you can see, I can come up with a number of other examples. The point is that coker, which is one of our flagships is still doing well with the severe service business, but we're also growing in other severe service sectors, next slide. [Foreign Language] So that's a great breakthrough. And you can move on. And I want to talk about the Navy surge. So within the last 3, 4 years, the U.S. government has decided to renew its fleet of aircraft carriers. And we're getting a very significant influx of new orders there. But this one is actually interesting because this is a new product that was supplied by a competitor of ours. And that's -- we were told by the Navy that's the result of we being able to earn their trust in the last few years, investing in project management systems that I alluded to earlier. Next slide, please. Nuclear, [indiscernible] and move on. So you have here the example of a very well-established French operation in the nuclear sector in China. So CGN is the operator on behalf of the Chinese government. And so we've got a lot of orders in the last few years from China for our French operations. Move on to the next slide. [Foreign Language] Next slide. And here is the last nuclear submarine. It's the first of a series of 6 new-generation nuclear attack submarines, and it was -- did its inaugurating navigation earlier this year. And it contains a lot of valves produced by our 2 French subs. So that was an interesting moment that made our French colleagues very proud. Moving on to upstream midstream. So one of the reasons why ABV has been such -- so successful last year is that they've been able to carve themselves a very strong niche in the FPSO market, floating, production, storage and offloading. That's what it means. So basically, these are boats that move and do the exploration from the top of -- from the -- the sea -- the surface of the sea. And we've got from a customer there, significant orders, and this is one example, if you move on to the next page, it only -- not only covers ball valves where we have a center of excellence in Italy, but also axial, no slam, check nozzle valves, they look beautiful, and we've earned their trust in that new technology as well. Next slide, please. [Foreign Language] Next slide, please. [Foreign Language] Another example. We've just introduced, that's just fresh out of the oven, a new butterfly valve from our torque seal family, we call it Torque Seal 2.0. What you need to focus on the drawing, you see the #1 there. That's a stem-disc spline design on which the disc is fixed. And that design allows for a much more homogeneous distribution of the pressure from the disc to the sealing, the gasket -- the seat, which allows for a much more robust and leak-proof sealing. So that's been well recognized by the initial wave of customers we're after, and we're going to be getting orders in the next few weeks as we're launching this product. This one -- this is a product in -- one of the first self-generated product introduction in a few years -- in the last few years, and we expect to generate a lot of generic growth with more news of the sort that are coming out. So this concludes -- I'm now ready to conclude and move on to the next page. If I summarize my message, you may have heard a positive edge to my presentation. That's because a lot of good things are happening. But the depth and uncertainty of the crisis that's hitting the global economy right now is not lost at all on the Board. We're very, very conscious that we're going into -- have entered a very difficult period. We don't know how long this is going to last. We have the strength of a very balanced portfolio and the combination of our actions, have made us ready to confront with the storm. We have a stronger balance sheet, as I said, and we're more resilient, thanks to the actions taken in the last couple of years. And who knows? This industry is going to go through, for sure, lots of reshaping. We're seeing it in every industry, and we want to be ready to capture the opportunities that this may bring. So my last word goes to our employees. There's a lot of disruption ahead of us probably, but there's been a lot of change also internally in the last 2 years. I'm very proud of how our employees have reacted, and they've proven their capacity to handle enormous change. So their resolve inspires all of us. [Foreign Language] Thanks for your attention.

Thank you, Yves, for an excellent review of the last year. And also thank you for your strong leadership during the COVID pandemic crisis and through the V20 transformation. The scrutineer has presented the report and advises that all resolutions have been approved by at least a majority of votes cast at the meeting in person or by proxy as required. Accordingly, I declare that all resolutions have been carried. The final voting results will be released after the meeting in the usual format and will be available under our profile on SEDAR. [Foreign Language] Are there any questions now? [Foreign Language] We're taking a pause of 1 minute now to receive any questions that there might be -- so you can enter them in writing on the Lumi site. Okay. Well, we didn't get any questions. I guess the presentation was self-explanatory. So anyway, thank you for your participation. May I now have a motion to conclude the meeting?

Mr. Chairman, I move that the meeting be concluded.

Thank you. May I have a seconder?

Mr. Chairman, I second the motion.

Thank you. Absent any objection, I declare the motion carried and the meeting terminated. Once again, I would like to thank everyone for their participation in this virtual meeting. [Foreign Language] Until next year. Thank you.