Velan Inc. (VLN) Earnings Call Transcript & Summary

Greetings, and welcome to the Velan Inc. Q3 Financial Results Conference Call. [Foreign Language] Please refer to the conference call section of the press release for the link to the company's Investor Relations site, where you will have access to the presentation. [Operator Instructions] [Foreign Language] As a reminder, this conference is being recorded on Thursday, January 12, 2023. [Foreign Language] I would now like to turn the conference [Foreign Language] Mr. Bruno Carbonaro, CEO and President. [Foreign Language].

Good morning, everybody. Bruno Carbonaro speaking. Welcome to our conference today. I'm joined by Rishi Sharma, our CFO, and we'll present the results of our Q3 for fiscal year 2023. I will comment the highlights of the Q3 with the sales amounting to $95.2 million, which is an improvement of more than $10 million versus the second quarter, but it's less than the sales in the same quarter last year, and it's shown on the right of the slide. In terms of EBITDA, $6.1 million, which is obviously better than $1.4 million we reported during the previous quarter but lower than also the same period of last year. It's important to notice that, that explanation is on the volume of sales. In terms of gross profit there, the gross profit of Q3 this year is comparable to the same quarter of the last year. This EBITDA of $6.1 million translating to $2.7 million of net income for the quarter. In terms of backlog, which is a [ turning ] point for me, we keep a backlog, which is shy of $500 million at $488 million. The decrease of the backlog is mainly due to the variation of the foreign exchange between the euro and the dollar because most of our bookings are leading to our European operations [ booked in front ] [indiscernible] . In terms of net cash, we are at $29.3 million, so we were able to protect that position in Q2 even we have expected [ excellent ]performance in terms of [ gross ] debt. I'll now turn over back to Rishi that will give you further details of the presentation.

Great. Thank you, Bruno. Good morning, everyone, and a happy new year to you all. I will walk you through our key financial metrics for the quarter and provide some color on where we landed for Q3. Backlog for the quarter closed at a solid $488.3 million or $11 million and 2.3% higher than the prior quarter as a result of strong bookings at $99.2 million at a book-to-bill of 1.04 for both the quarter and year-to-date. The strong bookings in the quarter were driven mainly by securing a large order in the marine business for the North American operations, our continued growth in bookings for our nuclear business in France and a slight improvement in the bookings for our oil and gas operations mainly in Italy. Of the current backlog of $488.3 million, $336.2 million of this is shippable over the next 12 months, giving us confidence in our short-term revenue stream. Furthermore, although we have seen some improvements in the euro to USD rates, the backlog was nonetheless negatively impacted on the translation to USD by USD 21.6 million coming mostly from our euro-based operations and backlog. We look at Page 7 for sales. Sales for the quarter, as mentioned by Bruno, amounted to $95.2 million or an improvement of $10.2 million or 12% compared to the second quarter, although a decrease of $14.7 million or 13.5% versus the same quarter in the prior year. For us, in Q3, continued focus on shipments and deliveries while managing the now stabilizing headwinds in logistics and supply chain allowed us to recover from the slow start we experienced in the first half. Our North American operations continue to ramp up with $62 million of sales improving both quarter-over-quarter and year-over-year, while our French nuclear operations, assuming a constant currency, also grew year-over-year. Our Italian oil and gas sales continue to be affected by the softer booking experienced in the sector at the end of full year '22 and the first half of full year '23. But as mentioned on the previous slide, we have seen some improvements in the booking activity. The currency impacts on our revenues were $4.9 million negative for the quarter and $15.9 million negative year-to-date driven mainly by the average rate used to convert the euro to USD. If we move to Page 8 on our profitability evolution. Gross profit for the quarter amounted to $29 million or 30.4%, which is an improvement of $5.5 million or 280 basis points compared to the second quarter but a decrease compared to last year's 35.9% or 32.6%. Although we are very happy with our performance in Q3, we understand and acknowledge the amount of work that remains for us to continue on to a steady path of improvement. It is, however, important to note that the gross profit for the 9-month period of the prior year was 30.1% net of government subsidies related to COVID-19, which we did not collect this year. Our administrative costs net of asbestos continues to trend in the right direction with our continued focus on cost control and have contributed in part to an EBITDA and adjusted EBITDA improvement of 480 or 400 points, respectively, compared to Q2 [ year-over-year ] and compared to prior year. If you look at Slide 9, on the net cash analysis, our net cash amounted to $29.3 million at the end of the quarter, which was stable versus the last quarter but a decrease of $24.2 million since the beginning of the fiscal year. The decrease in the net cash is primarily attributable to the lower net income combined with the ramp-up, as you can see, on the working capital items and the ongoing repayment of our long-term debt. In the year, we have repaid $4.8 million down of our long-term debt. However, in the quarter, the company did draw on its credit facility in the amount of $5.4 million to support the very strong ramp-up expected to see in the fourth quarter of the current fiscal year. During the quarter, the company was also better able to manage its cash flows through various AR and AP initiatives, and the negative impact from the customer deposits related mostly to revenues related to one large order as well as the timing effect of receiving advances from customer bookings secured in the later part of Q3. The overall liquidity remains strong at $137.6 million of available cash on hand and facilities. I'll now pass it back to Bruno for his closing comments before we take questions. Thank you, Bruno.

Thanks, Rishi. As the closing comments, I think we are still in a world which is a little uncertain and have a very low visibility. So it's extremely important for us to be prudent and to make sure that we navigate these times with caution and in making sure that we can benefit from some good things and protect against the [indiscernible]. We have 2 big protections: a, that we fund our backlog, which help us organize for the future and help us being more disciplined. That then provides visibility to you, [indiscernible] using strength of our balance sheet. That's extremely [ important ], and we continue to protect that because actually that would help us navigate through uncertain times. We are focused on being prudent and executing problems with discipline and execution, the key word in my discussion with my teams. We've seen a lot of progress in Q3, and we will continue to progress in Q4, which is absolutely needed for us to deliver a strong Q4. As you saw on my previous -- on my first slide, I think Q4 is always a very strong quarter in the year and the [indiscernible] balance of the year. It will be -- it will help us compensate for a slow start of the year. We acknowledge that our Q1 wasn't as good as we have expected. So we put all our efforts just to have a bit strong end of it. I'm now ready to take on any questions they have.

[Operator Instructions] [Foreign Language] We do have a question from Robert Beutel with Oakwest Corp.

Yes. Congratulations, gentlemen, on a very solid third quarter, and nice to see the improvement.

Thank you.

My question, gross margins are quite nice and you're moving in the right direction. But my question is really about balance sheet. Last year, you begun putting aside provisions. And as I understood it, they were largely in anticipation or to allow for asbestos issues as they arise. And correspondingly, you have current provisions and you have noncurrent provisions. Am I safe in assuming that, that is largely or exclusively for asbestos expenses?

That's correct, yes.

Okay. And so to the extent that the ones in the current category of almost $15 million, those are for the next 12 months. And the one is the -- one current of about $16 million or $16.5 million, those are for ones going out after 12 months. So far, so good?

Yes. [indiscernible]

Do we mean 1 year or many years?

Okay. Can you hear me, Robert?

Yes. Can you hear me?

Yes, yes, we did. I just tried to correct myself. So on the long-term portion for the provision, yes, that's specific, and I'll get back to your -- to answer your questions. On the current portion on the financials and the balance sheet, there's an embedded portion within there related to asbestos. And then there's normal provisions related to warranties and so on and so forth. So I just want to make that clarification. To your question on the long-term portion, it's long term, so beyond 12 months. I mean the information available to us on hand with the number of claims that we know of does not determine a point of settlement. So we understand it could be beyond 12 months, which is why we then classified it as long term.

Okay. And I guess where I'm headed is to ask whether you believe that is sufficient for all current and future or whether that is sort of what you can see when you look at -- that's what you are aware of or have been filed today, so to speak.

It's what we are aware of today for non-claims.