Velan Inc. (VLN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Velan Inc. Q1 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Friday, July 11, 2025. I would now like to turn the conference over to Rishi Sharma, Chief Financial Officer. Please go ahead.

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 paragraph mentions that the presentation provides an analysis of our consolidated results for the first quarter ended May 31, 2025. The Board of Directors approved these results yesterday, July 10, 2025. The second paragraph refers to non-IFRS and supplementary financial measures, which are defined and reconciled at the end of the presentation. The last paragraph addresses forward-looking information, which is 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, unless indicated otherwise, all amounts are expressed in U.S. dollars and all financial metrics discussed are from continuing operations. I'll now turn the call over to Mr. Jim Mannebach, Chairman of the Board and CEO of Velan.

Thank you, Rishi, and good morning, good evening to everyone. Please turn to Slide 4 for a general overview of the first quarter of fiscal 2026. Despite the turmoil in the global markets caused by tariff situations, Velan delivered a solid performance in the quarter, growing sales by 18.6% year-over-year to $72.2 million and increasing gross profit margin by 100 basis points to 28.6%. The double-digit sales growth notably reflects higher shipments from our Italian operations, where we continue to execute on important orders for the oil and gas industry and in particular, enabling continued growth in offshore production. Our operations in China, India and Germany also delivered higher business volumes. Finally, we have a strong performance from maintenance, repair and overhead activities, which we refer to as MRO I'm also pleased to report our cash position exceeded $59 million at the end of the quarter, its highest level in the last 5 years. Following the closing of our much discussed asbestos-related transaction sale of our French assets. The strong financial cushion will enable us to review our strategic options for the upcoming years, mainly establishing a balance between supporting our long-term growth objectives and maximizing return to shareholders. In this regard, I'm pleased to report that the Board of Directors yesterday approved a change in our dividend policy, resulting in a significant increase in the quarterly dividend payment from CAD 0.03 per share to CAD 0.10 per share. The increase reflects our growing backlog and the Board's confidence in Velan's future financial performance and our ability to sustain strong cash flow generation. The next dividend will be paid by the end of August. Turning to Slide 5. Our order backlog reached $286.1 million at the end of the first quarter, up 4.1% from the beginning of the year as our booking activity exceeded shipments during the period. At quarter end, 84.4% of the backlog, representing orders of $241.3 million were deliverable within 12 months compared to 90.5% at the end of Q1 last year. As anticipated, the shift in our delivery schedule is mainly due to an increasing number of large long-term contracts for the nuclear and defense sectors. The sheer size of these deals and high-margin profile benefit our overall business. Bookings totaled $78.2 million in the first quarter of fiscal 2026 compared to $83 million a year ago. The decline is attributable to lower year-over-year bookings in Germany and North America as both were up against large orders received in last year's first quarter. These factors were partially offset by higher bookings from our Chinese and Portuguese operations as well as an increase in MRO bookings. Moving to Slide 6. To further expand on China, we're pleased with heightened booking traction for our industrial valves. Traditional power development is booming to China. This is having a nice spillover effect on our business, and we're confident it will remain robust for some time. As for tariffs, although China has been hit by tariffs for its U.S. products, most of our manufacturing output in our plant in China is sold domestically. Consequently, these products are not exposed to U.S. tariffs in a meaningful way. Another area poised for solid growth is the Middle East, which represents the largest market worldwide for oilfield valves. If you'll recall, I mentioned in the last conference call that we had established a joint venture in Saudi Arabia to strengthen our presence in the region and capture opportunities. Our activities in Saudi Arabia are steadily increasing with the JV achieving important qualification standards, resulting in award of its first significant production order, adding rapidly to a growing quotation funnel and backlog. Continuing on Slide 7. A third growth area often unnoticed is our MRO activity. Given our unmatched installed base developed over 75 years across several industrial markets, we obtain a steady flow of orders that are connected and quickly converted into sales. For example, we have a 90% penetration rate at all oil refineries in North America, which supports a steady stream of repeat business, which was reflected in our bookings in the first quarter. Finally, I'll say a few words about our nuclear power business. We continue to work diligently with the key players to supply them with the most reliable valves in the industry, many of which are proprietary in design for standard and small modular reactors. Obviously, the revenue recognition cycle related to nuclear power projects is often longer term, which, as mentioned, will change the profile of our backlog over time. We expect to make announcements about expanding agreements with high-profile customers in the near future. As I highlighted at our annual meeting yesterday, we remain very bullish about the nuclear sector. Nuclear energy is increasingly being relied upon as a viable alternative to fossil fuels and electrification goals, which cannot be met without a prominent role for nuclear power. Before turning the call over to Rishi, I'd like to further address the tariff situation. I've already mentioned the minimal impact on our Chinese business. A substantial majority of our Canada-U.S. trade is made under the USMCA trade agreement. It's premature though, to comment on the rest of our network since the situation continues to evolve and as we see often daily. Nonetheless, we've reacted quickly to the changing tariff landscape. Thanks to our extensive and flexible global manufacturing and sourcing footprint. I'd like to thank our team and call out for their preemptive measures taken to reduce the impact of tariffs as much as possible on Velan's business. We will continue to monitor the situation closely and take appropriate actions to best position the company for the long term. At this point, I'll turn the call over to Rishi.

Thank you, Jim. Turning to our first quarter results on Slide 9. Sales totaled $72.2 million, up 18.6% from a year ago. As previously mentioned, the growth was mainly driven by increased shipments from our Italian operations, along with higher volume at our businesses in China, India and Germany. These factors were partially offset by lower sales in other international markets. North American sales, meanwhile, were relatively stable year-over-year as lower shipments to the defense industry were compensated by stronger MRO activity. By customer geographic location, North America accounted for 49% of total sales in the first quarter of fiscal 2026 compared to 62% last year. Asia Pacific represented 41% of total revenues, reflecting strong sales activity in China and India versus 12% a year ago. Europe, Africa and Middle East as well as South and Central America accounted for the remaining 10% of sales. It should be noted that our regional revenue split has shifted away from Europe following the sale of our French assets. Moving to gross profit on Slide 10. It amounted to $20.6 million in the first quarter of 2026 compared to $16.8 million last year. The increase was primarily due to higher sales volume, which positively impacted the absorption of fixed production and overhead costs, and more favorable product mix compared to last year as well as lower material costs and reduced provisions for agent inventory. As a percentage of sales, gross profit improved to 28.6% from 27.6% last year. Administration costs totaled $18.3 million or 25.4% of sales in the first quarter of fiscal 2026 compared to $15.4 million or 25.2% of sales a year ago. The year-over-year variation reflects higher sales commissions and increased professional fees. We recorded restructuring expenses of $5.4 million during the quarter. These included $6.1 million in related -- transaction-related costs, partially offset by the reversal of asbestos-related costs of $0.7 million. Excluding restructuring expenses, adjusted EBITDA amounted to $4 million, up from $2.8 million last year. The year-over-year improvement in adjusted EBITDA can be attributed to higher gross profit, partially offset by increased administration costs. As the company benefited from a $23 million tax recovery related to the sale of the French assets, net income from continuing operations totaled $17.8 million or $0.83 per share compared to a net loss of $2.2 million or $0.10 per share last year. Excluding restructuring expenses and the tax recovery, adjusted net income from continuing operations was $0.1 million versus $0.2 a year ago. As mentioned in the previous call, results from discontinued operations included a gain of $95.8 million on the sale of the French assets. The sale also triggered the recognition of a negative cumulative translation adjustment of $12.5 million. This adjustment reflects the impact of fluctuating exchange rates on assets and liabilities denominated in foreign currency, more specifically, the accumulated gains and losses from translating foreign currency financial statements into the parent company's reporting currency over time. Turning to cash flow from operating activities on Slide 11. We used $15.5 million in the first quarter of fiscal 2026 before net changes in provisions, but including the payment of $6.1 million in transaction-related costs compared to generating $12 million a year ago. The unfavorable movement in cash was mainly due to negative changes in nonworking capital items this year versus last as this year has had a lower short-term customer deposits, whereas last year showed an important cash inflow from the collection of receivables. Finally, as Jim mentioned earlier, our financial position improved substantially after closing the transactions. As at May 31, 2025, the company held cash and cash equivalents of $59.1 million and short-term investments of $0.4 million. Bank indebtedness stood at $3.3 million, while long-term debt, including the current portion, amounted to $16.4 million. As you may recall, we entered into a new credit facility, making $35 million available over a 3-year period. The facility was funded and operational in late June. With these available funds, our strong cash position and a significant reduction in our business risk, we are very well positioned to further invest in our operations and consider strategic acquisitions to broaden our reach and sustainable profitable growth. I will now turn the call over to the operator for the Q&A session.

[Operator Instructions] Your first question comes from Sebastian [ Sharlin ] with Agave Capital.

Solid quarter, my first question is regarding the MRO activity we've been seeing an uptick in recent quarters. Is it mostly regionally in North America? Or is it fair to expect more in the rest of the world as well?

Yes. Good question. In the quarter, most of the MRO activity that we saw the increase was in North America. However, we're starting to see an uptick in Europe as well. As you know, we have a significant installed base in the Middle East as well as throughout the rest of the world, and we're starting to see a recovery there, too. Part of the Middle East recovery in MRO sales, we think, attributable to the joint venture. The presence in that part of the world is vitally important to secure those orders going forward. But as I said, in the first quarter, most of the activity that we referenced was in North America.

Got it. I was looking at customer deposits, and it seems to fluctuate a little more significantly than bookings. I'm wondering, does that has to do with the sort of sales mix between MRO and product? Or is it more of an industry, oil and gas, nuclear? What's influencing the mix for the deposits?

It's really industry. So if you look at longer term nuclear and defense, you would have more substantial advances for MRO activity, for example, standard project would not have so much last year in the first quarter, if you recall, we had quite a bit of order intake on nuclear and defense. So that growth versus this year.

So underscoring the point, Rishi is absolutely right. It is a lot about industry specific. It's important to note on long-term contracts, whether it's in defense or nuclear or with our ABB operation in oil and gas. We work very hard to structure these contractual relationships to stay ahead of the working capital curve as well. We're happy to take on the risk on major projects, but we do it in a way that's prudent in terms of protecting the shareholders' interest too over time.

Perfect. Regarding the perhaps slower bookings in North America and slower might not be the right word because you had -- as we just talked about, a large comp from last year. Is it reasonable to assume that the turmoil that has happened during Q2, whether it is tariffs or the trade war or there was also a Canadian election, sometimes we forget, could this have somewhat affected at least the procurement side of bookings in North America.

Absolutely. There's no doubt that the continued turmoil in the United States with the ever-changing tariff landscape is having an effect. So what we're seeing is some end customers are delaying projects or MRO activity. On the other hand, we're also seeing some indication of return to North American sourced product as opposed to Chinese product just to address the potential outlook on tariffs as people see that as well as the ongoing turbulence in terms of Chinese sourced material. As I mentioned in my comments, from our Chinese facility, we export a small number of finished product into the U.S., but we're not subject to most of the tariff turmoil in that regard. But still, to your point, at the end customer base, it's having a significant effect as people kind of wait out to see what the final resolution is from this tariffs. And hopefully, that happens in less than 4 years.

Yes. That's great color. And perhaps the last one for me before I join back the queue. I was rereading the circular last night. Regarding special committee, I know they were incentivized, especially in the French sale, which closed during the quarter, and that was awesome. I'm wondering the special committee has led by Mr. Desjardins, is it still in continuation? Or is it paused? Or how has it role evolved since the closing, if at all?

Yes. To clarify, the special committee is comprised of our independent directors who are not specifically -- they're not specifically incented for any outcome. Their job is to look over the options, strategic options available to the company and advise the Board. And as a consequence, me as the Chairman and CEO of the company and the rest of our executive staff. But that fine point aside, the special committee is still functional and operational. And like every Board, we're charged with always looking at strategic options to maximize outcome for the stakeholders.