Velan Inc. (VLN) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the 2021 Annual Meeting of the Shareholders of Velan Inc. My name is James Mannebach. I'm deeply humbled to have been entrusted with appointment as the first nonfamily Chairman of the Board of our company. As I've noted in my comments in the annual report, for decades, Velan has stood without equal in its products, application, knowledge and commitment to customers. We do things no one else can do. The COVID pandemic has destroyed much of the world's economy and of course, deeply challenges our business as well. Yet a concerted, and I know an overworked phrase, but in this case, I think, totally appropriate, heroic efforts throughout the world by the men and women of Velan, assured our business, so essential to the world's market, continue to deliver vital products and solutions, all the while assuring safety of our team. I'm especially inspired by our colleagues, who reported to work each and every day as the pandemic raged on. Their collective efforts, whether at their home, at their office or indeed in our factories, assured that despite unprecedented challenges, we've not merely persevered in this past year, we've excelled. The Board is committed to ongoing renewal and succession of our Directors. We're very pleased to support the nomination this year of 3 new Directors. Upon shareholder confirmation, we look forward to working with Ms. Suzanne Blanchet, Mr. Robert Raich, and Mr. Edward Kernaghan. As you might know, ISS has recommended that shareholders withhold votes for Mr. Kernaghan, owing to the number of Boards he currently sits upon. The company agrees with ISS' concerns with respect to Director overboarding. Mr. Kernaghan, a significant Velan shareholder, has agreed that if elected, he will reduce his Board commitment in line with ISS' recommendations. In closing, I expressed my deepest appreciation for the tireless efforts of our colleagues and leaders throughout the world. During these days of COVID uncertainty and unrelenting stress, your commitment stirs and strengthens us all. Thank you. I also thank Board member Jacques Latendresse, retiring after 8 years of service to our company. Jacques has truly provided inspiration through his passionate, unrelenting insistence that the company strive for excellence and do so with the utmost of urgency. Finally, to you, our shareholders, we're grateful for your continued support and patience as we work to transform the company. As Velan gains momentum in the recovery in world markets, we're excited to shape the next chapter of this great company as we build on our legacy. Indeed, we do things no one else can do. Now I'm not blessed with French and linguistic skills, so at this point, I'm going to turn the role of the Chair to Rob Velan, the Vice Chairman of our Board of Directors. Rob?

[Foreign Language] I now formally call the meeting to order in accordance with the bylaws of the corporation. We intend that the meeting be conducted efficiently and effectively, and I would ask for your cooperation in this regard.

Instructions on how to ask questions and the voting procedure will appear on your screens. As with any new technology, unexpected glitches may occur, but our service providers for this platform at Lumi are very experienced at running this type of meeting and will help us out.

As we move through our agenda to consider each formal item of business, I'll give registered shareholders, appointed proxyholders and guests an opportunity to ask questions. [Operator Instructions] When entering your questions, we ask that you state your questions as clearly as possible and specify the item of business that your question relates to, so that we can ensure it's considered and addressed. During the formal business of the meeting, your questions should be limited to the specific motion or item of business before the meeting at that time. All proper questions that are relevant to the item of business being discussed will be read out loud by John Ball and responded to while that item of business is before the meeting. Today's votes will be conducted by a poll. Every shareholder entitled to the vote to -- entitled to vote on the matter has 1 vote in respect of each share held by that shareholder. Shareholders who voted in advance of the meeting do not need to complete the ballot or take any further steps to cast their votes, unless they wish to change their vote. If you do vote by ballot at today's meeting, then that will automatically revoke your prior vote or any prior proxy granted. On behalf of the Board, I wish to express thanks to those shareholders who submitted their proxies in advance. Please note that only registered shareholders who held shares on June 9, 2021, the record date for this meeting, or validly appointed proxyholders, are entitled to vote at this meeting. If you're not a registered shareholder or a duly appointed proxyholder, you are attending this meeting as a guest. Guests will be able to listen to the meeting and ask questions, but not to vote during the formal part of the meeting. The poll for the election of Directors will be open until we proceed to the following item of business on our agenda, the appointment of Auditors. Polls for the remaining items of business will then be open until the end of the formal portion of this meeting. I'll provide the results of voting at the end of the meeting based on information provided by our Scrutineers. The final voting results will be released after the meeting in accordance with our usual practices, applicable laws and stock exchange requirements and will be available under our profile on SEDAR. We'll now proceed with the formal business of the meeting. With consent of the meeting, I appoint AST Trust Company, acting through its representatives, Bertrand Gely and Isabelle Vachon, to act as Scrutineers for the meeting. The Scrutineer has reported in its preliminary report on attendance that there are at least 60 shareholders and/or proxyholders present at this meeting, representing in person or by proxy, 15,566,567 multiple voting shares and 2,568,330 subordinate voting shares, that being 95.88% of the total voting rights attached to all shares issued and outstanding from the corporation. A final Scrutineer's report on attendance and voting will be filed with the records of this meeting. There are an item -- there are a number of items of business to present to the meeting. These matters were set out in the Notice of Meeting and the Management Information Circular mailed to all shareholders. Today, you'll be asked to do 4 things: First, receive the consolidated financial statements of the corporation for the financial year ended February 28, 2021, together with the Auditor's report; second, elect the Directors; third, appoint the external Auditor and authorize the Directors to set the external Auditor's compensation; and finally, transact such other business, if any, as may properly come before the meeting or any adjournment or postponement of the meeting. May the Secretary confirm the proper notice of the meeting has been given?

Yes, Mr. Chairman. Notice of this Meeting and the Circular were duly provided to shareholders on May 23, 2021. I direct that the Notice of the Meeting be annexed to the minutes of the meeting. I have been advised by the Scrutineer that we have a quorum. I will table the final Scrutineer's report on attendance and voting once it is ready.

I'll ask the Secretary of the meeting to read the text of the Notice, unless a motion is made to dispense him from doing so.

Mr. Chairman, I so move.

Does anyone second the motion?

Mr. Chairman, I so move.

[Foreign Language] I now declare this meeting to be properly constituted for the transaction of business. The next item of business is the presentation of our 2021 audited, consolidated financial statements together with the Auditor's report thereon. A copy of the 2021 Annual Report, which contains the audited, consolidated financial statements and the Auditor's report for the year ended February 28, 2021, has been mailed to each registered or beneficial shareholder who requests a copy. The Board of Directors has approved these financial statements and the Secretary will now table the annual report. The next item of business is the election of Directors. The Board has decided that 10 Directors will be elected at this meeting and has proposed 10 nominees. Each proposed nominees' biography is included in the Circular. I now declare the meeting open for nominations. May I have a nomination for the nominees proposed to be nominated by the Board and by Velan Holdings.

Mr. Chairman, I propose the following 10 persons to act as Directors of the corporation: Tom Velan, Robert Velan, Ivan Velan, William Sheffield, Yves Leduc, James Mannebach, Dahra Granovsky, Robert Raich, Suzanne Blanchet, Edward Kernaghan, and move that they be elected Directors to hold office until the next Annual Meeting of Shareholders or until their successors are duly elected or appointed.

Thank you. May I have a seconder?

Mr. Chairman, I second the motion.

Thank you. Are there any other shareholders wishing to make nominations for election as Directors? Therefore, I declare the nominations closed. Is there any discussion on the matter? As a reminder, if you have a question relating to the motion nominating each of the Directors, please type it in now. Okay. So if there's no further discussion, I now call for a vote on the motion. Please submit your vote on the Lumi platform, and we'll pause here to give you time to submit your vote. [Voting]

Thank you for voting. The poll for the election of Directors will now close. The next item on the agenda is the reappointment of the Auditor for the ensuing year and the determination of the Auditor's remuneration. May I have a motion with respect to the appointment of the Auditor?

Mr. Chairman, I move that the PricewaterhouseCoopers, Partnership of Chartered Professional Accountants, be reappointed as Auditor of the corporation until the next Annual Meeting of Shareholders, and that the Directors be authorized to fix their compensation.

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 questions, please submit them now. If there's no further discussion, I now call for a vote on the motion. Please submit your votes now. [Voting]

Thank you for 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 we 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.

[Foreign Language] An excellent metaphor for the year we've gone through is this turbulent, torrent painting from Dana Velan, the spouse of Tom. So as a torrent, we're still very strong. It was a very turbulent year, and we stayed in our bed as you will see. So I think a perfect introduction to my narration of what ended up being a historic year, very, very rich in events. And I will start by mentioning the few key changes that not only have occurred at the Board level, but also at the management team. So in addition to Rob becoming Vice Chairman last fall, obviously, Tom stepped down as Director -- as Chairman, but remained a Director and has remained an adviser -- a close adviser to me on strategic matters. Very happy to have Jim pay close attention to strategy. We've been working together very closely in the last few years. And you can see from his quote that he will be spending a lot of time focusing on growth. Shane has been promoted to Chief Information Officer. And Benoit Alain just reached the team coming from industry. He's been Head of Finance in industrial companies like ArcelorMittal, Cascades, there's also led companies. And Paul Poirier comes from industry as well, has worked at CAE and [ Corning and ] is the ideal leader of our global operations and supply chain. I'm not going to dwell on the quote here. I want you to remember is I'm a very, very proud, the leader of a company that went through a very tough year and excelled and using the words of Jim, with whom I agree, they were heroic efforts. And in the end, our health and safety performance, despite the pandemic, ended up being one of the best in history, as I will say later. [Foreign Language] So as I said many times, it turns out that our manufacturing footprint matches perfectly the original itinerary of the virus with plants in China, Korea, North and Italy, France. I'm sure that triggers a lot of memories, but also, obviously, Quebec, Northern U.S., India, Taiwan, Portugal and Germany. So we saw it coming, I guess, earlier than most companies. And a few words on how we responded to the challenge of having to write the book on how to run a manufacturing operations in a pandemic, a book that's never been written before. First of all, focus on protecting our employees and supporting our local communities. We expanded the protocols, obviously implemented social distancing and supported local communities, as you can see here from the picture. We had to argue for essential status in industry serving, for example, the Navy, the power industry. The pandemic had a significant impact on our sales, as you will see, but we were able to maintain a constant flow of our global operations, and that was great. Organization, leadership, communications, I mean, we doubled down on this. And you see a picture of me here whereby Bruno and I shared the task of communicating every week to our employees, talk about what was going on, not only from the point of view of responding to a crisis, but also how things were going and how we succeeded in bringing the company a little closer together, improving interdivisional collaboration like we've never seen before, and I'll show you many examples of that. So in many ways, we turned a crisis into opportunities, and I'm very proud of that. [Foreign Language] As you can see, very well-balanced sales across geographies, and our sales were hit as a result of the pandemic quite importantly. We were able to turn a profit for the first time in 4 years. And that's the result of many factors, not the least of which is the improved gross profit percentage as a result of putting a lot more emphasis on margin, good margin orders, reducing our structural cost in North America through V20. The full effect of which will be felt this year and in the years to come, but the fact is that we accelerated the implementation of V20 despite the pandemic. Our sales and margin are growing incredibly fast in India, also directly related to the V20 program. We maintain a very strong performance in France. And notably in Italy, where, as a reminder, the price of oil dropped to minus $34 back in April, and it wasn't too clear what happened to our sales and bookings in Italy. Well, it turned out, as I say later, that the turnaround was incredible. We also were able to sell the Montreal plant much earlier than originally planned, a very, very strong market plan -- market price. And we're able to benefit from Canadian federal subsidies that prevented us or avoided the need to proceed to massive, significant layoffs. And I'm very happy that we were able to maintain the integrity of our organization because now with a near-record backlog, we need all the talent we have. So that was also a good development here in Canada. As I said, we have near-record backlog levels, 38.3% increase in our backlog. A book-to-bill of 1.41. Everyone contributed, largely thanks to our incredibly strong positioning in Southeast Asia, China and India, where orders benefited all of our subs in all of our strategic businesses. So France, Italy, severe service, project manufacturing, all benefited from the historical strong presence that Velan has in those growing markets. [Foreign Language] As you can see, the momentum is carrying into Q1, which I'm about to talk about. Q1 fiscal '22, basically flat sales compared to last year. That's the results. Why flat? The result of sales in Italy being delayed through logistics problems or customer delaying shipments, but that will all be recovered in Q2. But we're also suffering from the very, very low bookings in the MRO business, which I just talked about, affecting our distributor channels here in North America. We're seeing signs of the MRO business recovering. But right now, we're carrying out a very small backlog compared to previous historical years in that business. The very good news is the business health improving as reflected by a jump in our gross margin of up to 280 basis points result of everything I mentioned before and the structural improvements we brought to our North American capacity and also the transfer to India, which made the MRO business grow in profitability. Unfortunately, the growth in margin wasn't able to offset the higher administrative costs that are largely due to temporary factors like liability exposure that grew in the quarter but also sales commissions. And also, of course, we're getting lower Canada emergency wage subsidies compared to last year. Bookings were extremely healthy, up 51.7% compared to last year. And our backlog has even grown further after a near-record level at the end of last fiscal year, growing 8% since the previous quarter. It's the highest since 2012. And as I -- as you see from the -- you'll see in a minute, our net cash is also in a very good position. As I mentioned, we're still benefiting from very strong presence in Southeast Asia, China and India. [Foreign Language] So quite a healthy strong balance sheet, and we aim to improve it as we drive on executing a very, very healthy backlog at the end of Q1. So basically, that's a summary of our financial results. More details tomorrow in the conference call that's scheduled at 11:00. What I'd like to do is maybe go through some of the key highlights of fiscal '21 that underpin the fact that, as I said earlier, we are a strong torrent, getting stronger, and I'll explain to you why. [Foreign Language] A reminder that when we -- V20 was not only about reimagining our North American manufacturing operations and Indian manufacturing operations, it was also about organizing -- reorganizing our sales and marketing efforts along 5 strategic businesses. And that paid off greatly because that extra focus allows us a lot more intimacy with our customers and focus on key market opportunities that need, require coordination across subs to be successful in capturing. So as I said, the MRO in aftermarket was, by far, the most hit by the global crisis. We're seeing signs of recovery. And the good news is the increased profitability of the entire business, thanks to the transfer of low-cost valves from Montreal to India that went extremely well and on time last year. The project business, we saw breakthroughs in petrochemical multiturn valve orders, a very successful business model serving the North American power market under Bruno's leadership is going very well. We're getting recurring orders under our contract, for example, with Florida Power & Light, and that's a new approach for the power market, which I believe has -- holds a lot of potential. Severe service. We have a backlog that is unprecedented. We multiplied it by 5 since we created the strategic business. Yes, we grew the backlog of severe service in Navy fivefold since we created the strategic business 2 years ago. We're seeing incredibly strong breakthroughs in severe licensed petrochemical applications, mining and Navy, and the HF acid product business, which is a small business out of Portugal. But that focus pays off because we're growing the HF acid business out of Portugal now in new markets like in Asia and North America has seen a breakthrough with the help of Rob's team here in North America. If we move on to the 2 other strategic businesses which are -- were already in existence, but from which we drew a lot of inspiration when we created the first 3 ones out of the North American operations, namely nuclear, where the center of gravity is France; but namely SAS, Segault. We also have a strong nuclear business based in North America. We maintained our leadership and momentum in the China nuclear market out of our French operations. We're seeing impressive breakthroughs in big science, namely the Indian aeronautical industry, hydrogen applications, nuclear fusion. And we won, and that's a remarkable achievement, a large control valve order in China. Won against the industry control valve leader, Emerson. I'm sure Jim is very proud of that because he's an Emerson alumni some time ago. Now he's tattooed Velan on his heart, but that was a -- remarkable. And if you know the flow control industry, you know that the control valve business is dominated by a few players. And I think that venture in that market shows that the French are not only about nuclear, but they're able to diversify. And I welcome that and support that and see growth opportunities also out of our nuclear-based business in France. We saw a spectacular rebound after the historical drop in oil price in April 2020. That, we thought, would affect greatly our upstream, midstream operations out of Italy. But following the spring, we achieved one of the -- in fact, a record booking in backlog for Velan ABV, thanks to their focus on very specific oil and gas applications like FPSOs, a breakthrough in our Saudi efforts, thanks to large orders of -- from Aramco. We're distinctive really in Saudi Arabia as one of the few manufacturers of API 6A valves that have a great reputation for on-time delivery. And a major milestone, we made the decision 2 years ago of converting or industrializing our Velan China plant for API 6D valves. So these are the lower-cost valves, lower margins. So to help protect our margin for those valves but also freeing up capacity in Italy. So as you can see, a lot has happened across our 5 strategic businesses last year. And I just want to give you some examples of major breakthrough orders. [Foreign Language] If you look at the mining business, it's actually broken out in the last 2 years after very, very slow orders in the previous years. Thanks to our focus on severe service, we've seen consecutive orders in mining, very, very severe applications. I'll be talking about that in a few minutes. But that was a big breakthrough. Now the mining business is back in our focus after having been quite slow in the previous years. I want to talk about hydrogen and our French team. So as you know, there's a lot of talk about clean hydrogen plants in the future. In fact, Siemens has just inaugurated a hydrogen power plant that's clean, that's green. And green meaning that it's also fueled by green energy. So the fact that we're able to produce out of France hydrogen valves known for their high-integrity casting and forging, which is basically one of the core fundamental elements of our value proposition, is a very promising step forward for the whole company, not only for France. So that small order is pointing to strong potential in our ability to capture the oncoming trends in the power market. Innovation breakthrough. So Jim said we do things that no one else can do. One of the things that no one else can do as well as we do is capture an order opportunity and turn it into a product development effort. And namely, we turn ordering or booking opportunities into innovation breakthroughs. And you can see 2 examples here. I mentioned the ebullated bed product. We got orders. We got licensed to produce an application with distinctive features, namely a patented thermal sleeve. We're importing fatigue life technology from the aerospace business to create that distinctive position. And thanks to our venture into that application in the last 2 years since the creation of severe service, now 80% of the whole market is covered by our design library. And that's positioning us for further growth in those severe applications. High-pressure acid leach acid field valves -- feed valves, so you see the word "acid" twice in the name of the valve configuration here, tells you it's one of the most severe valve applications out there. We've designed it in a way that allows much simpler and effective infield controls and maintenance, also as part of seeing the RFQ coming and the order opportunity when we capture the order, we were ready to come in with that innovation. Let's talk about V20. That's a very, very important milestone in the history of the company. [Foreign Language] So against those 5 key levers of V20, progress made was substantial in the midst of the pandemic last year. So just the booking performance shows the positive benefit of having reorganized our North American operations into 3 strategic businesses. Our -- the reorganization of manufacturing footprint is basically complete. We have one fewer plant in North America. Where we still have a lot of work to do is the turning into this new -- the lever #3, a new manufacturing model that's a lot more focused on assembly and testing, a lot less on in-house machining. So we're learning that model right now, and we're progressing, and we're going to see momentum going along that action item later this year. As far as transferring the product lines to lower-cost sites like India, that's basically done, and we're fully benefiting from the impact of having accomplished that. And the modernization of our systems and processes like VPM, like our finance systems, like the ERP upgrade of 3 years ago, something we undertook before we announced V20 but something that's continuing. So great progress on the V20 side. And when we talked about V20 transformation, we also want to talk about transforming the way we operate a global manufacturing footprint. And the word "transformation" here truly describes what has happened in the last 2, 3 years. First of all, you see here 2 examples of the 25 cells that we implemented through V20 in Montreal, Granby and India. You see the new large multiturn valve production cell on the left in Granby. Before that was an empty space in our Granby manufacturing plant, so that was a great success. And you see one of the cells in India on the right, the pressure seal valve cell basically that allows us to manufacture pressure seal valves, not only out of Granby, but also to serve the local Indian and Middle East market out of India very effectively. The example of a much more agile and flexible global manufacturing capacity you see here. Normally, these soft seated ball valves should have been assigned to Montreal, but had we done that, we wouldn't have won the order. So India is also capable of manufacturing ball valves, and you see a great progress in our ability to decide which plant should do what. And our investment in systems, in industrializing all of our plants, and it's also talk about China that is seeing great momentum right now, is part of an approach to our manufacturing -- global manufacturing capability that is truly cast and rooted in flexibility. That is if we win -- we need to win an order by leveraging our capacity for project manufacturing in Korea or Granby for a Chinese customer, we'll do it, and we've done it more than ever before last year. As I said, we've increased interdivisional cooperation, and the way we run our manufacturing capacity is a very good example of that. [Foreign Language] One of the first decisions we made under V20 was transfer the small forge acid -- HF acid valve line from Montreal to Portugal, and now Portugal has actually succeeded in growing that product line, complementing its cast product line for HF acid. So very good success there. So overall, I would say that V20 transformed our North American operations, India, but as triggered by the V20 plan, our leadership team, has been able to change our approach and saw in our manufacturing -- global manufacturing footprint, a leverageable asset and was able to drive that to levels unseen before. So that's part of being a torrent that is turbulent, but is growing in strength and force as we move downward. So in conclusion, if I'd like to talk to our investors now and say, "This" -- what are the Velan investment highlights. It really is 5 key pillars. My predecessors have done an incredible job building one of the best brands in the industry, something that even Jim -- probably when you were at Emerson, Jim, recognized when you came across that first Velan plant in Portugal, I believe, that it already had a fantastic brand reputation. And it's a reputation based on our outstanding engineering and innovation capability. So we're still building on that brand, and we'll continue nurturing it. We have one of the broadest and deepest global base of end users, and you saw the huge advantage that this provided us last year when the world was in turmoil, when the North American market basically stopped, even in Europe was very slow. We were able to achieve record bookings because of our strong presence in Southeast Asia and the Middle East, and that's something that is highly leverageable and the focus that Rob is bringing to the installed base through the MRO and aftermarket will expand to capturing that potential outside North America. V20. The infrastructure part of V20 is behind us. The hard investment part is behind us. And now it's about making our new manufacturing model in North America hum. But the fact is that we've improved our North American operations. We've improved our global manufacturing operations. And we still have and continue to have and have had for a few years already, truly outstanding world-class European operations. They're extremely profitable. So we're at a point where now having made the tough moves on North America, we're able to really look at how do we capture the potential of our distinctive strategic assets and fuel growth, which is the next lever that you see. Every one of our strategic businesses have action plans that are dynamic, that look to leveraging our own assets and capabilities. And finally, if you look at it from a corporate level, Bruno and I are looking at a very diversified portfolio of businesses, and they reach out in many different directions, and each of those directions offer potential for strategic diversification through generic growth, more focus or even acquisitions. [Foreign Language] In short, if I can -- may conclude here, there's been a lot of progress despite almost unimaginable crosswinds and turbulence in the last year, and that progress would not have been possible without the hard and courageous decisions made by our Board of Directors and also our majority shareholder, the Velan family, back in 2019. And also thanks to everybody's work and commitment to Velan's success throughout the most difficult moments. I want to thank all of them, our Board of Directors, the family and my management team for their exceptional efforts in fiscal year 2021. There's still many challenges ahead of us, but we're stronger coming out of the storm than when it hit us over a year ago. That's the metaphor. So on that note, I want to thank all of you, our investors, our loyal shareholders for your support and for your attention this afternoon. Passing it on back to you, Rob. Thanks for your attention.

Thank you, Yves. The Scrutineer has presented their 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 in SEDAR. [Foreign Language] So now is the time for questions from the floor. We'll take a quick pause, and you are able to now submit your questions electronically through the platform. Mr. John Ball, do we have any questions?

No, Rob, we do not have any questions on the platform.

Okay, then. 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. I'll now turn things over to our Chairman, Jim Mannebach, for a final word.

Thank you, Rob. Again, I want to thank all of our employees and leadership around the world. It's been an unbelievable year for everyone. COVID continues to rage across the world. Only today, we learned that Vietnam has now shut down its factories and ports again for an indeterminate period of time. Our work is not over, but the men and women of Velan are up to the challenge. And we've -- as I said earlier, we look forward to crafting the next chapter of the company. Thank you again for your participation in this virtual meeting. We hope next year to join you once more in person. Thank you.