Velan Inc
TSX:VLN
Earnings Call Analysis
Q3-2024 Analysis
Velan Inc
Following the termination of the acquisition agreement with Flowserve Corporation, Velan Inc. has channeled its focus back to growth and organizational strengthening. With a firm footing in areas such as the flow control industry, Velan's agility, manufacturing diversity, and solid branding have positioned it to capitalize on increasing demand associated with energy transition trends. The company is aligned with environmental trends, many of its customers seeking energy-efficient solutions to meet carbon emission targets, a niche where Velan has been investing for years. As the energy sector evolves, Velan sees this as an opportunity to support customers with their safe and reliable flow control needs.
While bookings in the third quarter descended to $78.3 million, representing a $99 million decrease from the previous fiscal year, there has been a sequential increase of nearly 10%. Encouragingly, activity has picked up in the fourth quarter, highlighted by substantial orders in Italy. The backlog has inched up by 4.5% to $485 million since the start of the fiscal year, indicating a resilient book-to-bill ratio. Despite a 15% year-over-year drop in sales to $80.9 million, influenced by lower North American sales and reduced MRO contracts, new records in other areas, such as Italy, and positive currency exchange impacts, suggest there are nascent signs of a turnaround.
The third quarter also saw Velan wrestle with operational hurdles. A decline in gross profit to $16.4 million was driven by lower sales volumes and the execution of a low-margin project. Gross profit margin compressed to 20.2% from 30.4% a year prior. Likewise, net loss widened to $7.3 million from a net income of $2.7 million in the same quarter the previous year. The adverse effects were partly mitigated by a 15.2% decrease in administrative expenses and unrealized foreign exchange gains. Velan expects an acceleration in shipments in the subsequent quarter, which along with a robust backlog and increased bidding and booking activities, holds promise for improved financial performance.
Despite the mixed financial results, Velan remains financially secure with a net cash position of $26.4 million and wider liquidity of $97.5 million. This stability offers Velan the confidence to manage its operational challenges and leverage its global presence and diversified customer base as it fixes its sights on growth and capturing emerging market opportunities.
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Greetings, and welcome to the Velan Inc. Q3 Financial Results Conference Call. [Foreign Language]
[Operator Instructions] [Foreign Language] [Operator Instructions] [Foreign Language]
As a reminder, this conference is being recorded on Friday, January 12, 2024. [Foreign Language]
I would now like to turn the conference over to Rishi Sharma. [Foreign Language]
Thank you, operator. Good morning, [Foreign Language] 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 section of the disclaimer mentions that the presentation provides an analysis of our consolidated results for the third quarter ended November 30, 2022. The Board of Directors approved these results yesterday, January 11, 2024. 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 refers to forward-looking information, which are subject to risks and uncertainties and are not guaranteed to occur. Forward-looking statements contained in this presentation are expressly qualified by this cautionary statement. Finally, all amounts are expressed in U.S. dollars unless indicated otherwise. I would now like to turn the call over to Mr. Jim Mannebach, Interim CEO and Chairman.
Thank you, Rishi, and good morning, everyone. During our last conference call, we communicated the unfortunate termination of the acquisition agreement with Flowserve Corporation following the French Government's refusal to approve the transaction. The chapter is now behind us, and we turned our focus at the company to strengthening the organization and growing the business. We believe Velan has tremendous assets at its disposal to further expand its global market reach. This includes an agile workforce, diversified manufacturing capacity, and above all, a solid brand reputation.
As a supplier of critical equipment to essential industries, we anticipate growing demand for our products driven by energy transition trends, and by our proven ability to provide solutions for the most demanding applications in a variety of market [indiscernible]. Delving deeper into environmental matters. Many of our customers have started carbon emission reduction targets and programs accordingly related thereto, and are increasingly looking for energy-efficient solutions to reach these objectives. Velan is directly aligned with this secular growth trend as we have dedicated significant resources to environmentally driven solutions for many, many years. A main goal of the company is to support our customers with safe and reliable flow control products for their existing and emerging needs. The energy transition under way creates challenges for customers in several industries, including nuclear, oil and gas as well as processing power. The challenges become our opportunities. And as a key equipment supplier, we are excited about playing a leading role worldwide in this ongoing transformation.
In parallel, we expect maintenance, repair and overhaul activity, which we refer to as MRO, on our extensive base of installed equipment to continue providing a recurring revenue stream.
To make sure we can rapidly capture growing opportunities, I assumed the role of interim CEO, alongside my duties as Chairman of the Board. My 35-year experience in flow control industry and 5-year tenure on the Velan Board should serve the company well. I'm also pleased to report that Rishi has been promoted to the role of Chief Financial and Administrative Officer, to oversee all of Velan's administrative functions in addition to his oversight to the financial team. Over and above, the entire Velan team is committed to building shareholder value and profitable sales growth and cash flow. Turning to our operating performance. Velan's backlog has increased 4.5% to $485 million since the beginning of the fiscal year. Of this, $361 million is expected to be delivered in the next 12 months. The increase is mainly attributable to changes in the profile of scheduled backlog shipment dates. The strengthening of the euro also slightly improved our position in backlog as well.
Third quarter bookings reached $78.3 million, down $99 million from last year as we were facing a tough comparable period with North American operations, recording large marine orders in the prior fiscal year, which was partially offset by higher oil and gas bookings in Italy. Sequentially, bookings were nearly 10% higher than those in the second quarter. And I'm pleased to report that the pickup of activity is continuing so far in the fourth quarter.
For instance, we recently signed new large-scale orders in Italy, which constitutes a record for our subsidiary. We are very pleased with the strong commercial activity we are seeing all across Europe.
As for our financial results, Rishi will provide more details in a minute, but in a nutshell, third quarter sales of $80.9 million reflected renewed sales activity in North America, which contrasted the large shipments reported during the same period last year.
Lower sales, combined with a drop in gross profit due to reduced volume, and the execution of a certain low-margin project negatively affected our profitability.
Net loss totaled $77.3 million in the third quarter of fiscal '24, while EBITDA was negative $2.3 million.
Although third quarter results were disappointing and unacceptable, we anticipate shipments to accelerate in the fourth quarter, driven by the execution of large-scale projects. In addition, our strong backlog and the recent uptick in bidding and booking activity provide confidence as we look to the projected sales in the new year. In summary, I want to stress that Velan's global presence and diversified customer base and focus on critical applications represent significant advantages in a highly competitive industry. We're resuming our focus on growth, and we're confident about our future opportunities worldwide.
At this point, I'll turn the call over to Rishi to share a financial review for the quarter.
Thank you, Jim. As previously mentioned, our backlog has increased 4.5% since the beginning of the fiscal year, reflecting a book-to-bill of 1.06 on a year-to-date basis. With a ratio of nearly 1:1 in the third quarter, the backlog held steadily, sequentially at $485 million during the period.
Bookings have increased sequentially and commercial activity remains quite robust in the nuclear sector in France as well as the oil and gas sector in Italy. Turning over to the income statement. Sales totaled $80.9 million in the third quarter of fiscal 2024, down 15% from 1 year ago. The variation essentially reflects a reduction in North American sales due to last year's shipment of a large oil and gas order. It also reflects lower MRO contracts based on extended transit times for orders passing through the Panama Canal that was affected by this year's unusually low volumes. These elements were partially offset by a positive $1.9 million impact on sales from the strengthening of the euro average rate against the U.S. dollar in the quarter.
On a geographical basis, sales outside of North America grew 6.5% to account for 43.6% of total revenues compared with 34.8% last year, mainly reflecting the solid activity in both France and Italy.
Gross profit reached $16.4 million compared to $29 million in the same period last year. The decrease is mainly due to lower sales volumes, which impacted the absorption of fixed production overhead costs and to the execution of any low-margin project during the quarter. These factors were partially offset by unrealized foreign exchange gains related to the fluctuation of the U.S. dollar against the euro and the Canadian dollar. As a percentage of sales, gross profit amounted to 20.2% compared to 30.4% last year. Administration costs decreased 15.2% year-over-year to $21.6 million. The decline reflects the recording in last year's third quarter of a $3 million provision for a potential settlement value of future unknown asbestos-related claims and lower freight cost based on reduced sales volumes.
As a result, EBITDA was negative $2.3 million in the third quarter of fiscal 2024 compared to a positive $6.9 million last year. The variation is primarily related to a decrease in gross profit, partially offset by lower administration costs.
Net income -- net loss totaled $7.3 million or $0.34 per share compared to net income of $2.7 million or $0.13 per share in the prior year. The year-over-year difference stems from lower EBITDA and higher finance costs.
Moving on to cash flows. Cash used by operating activities amounted to $4.9 million in the third quarter of 2024 versus using $3.4 million last year. The unfavorable movement of cash for the quarter is attributable to a decrease in EBITDA, partially offset by favorable movements in working capital items and net change in long-term provisions on our customer deposits.
During the quarter, as previously mentioned, we completed the purchase of the remaining 25% minority interest stake in our French subsidiary, Segault S.A.S. for USD 5 million. And that minitory interest was included in the current portion of long-term debt, this transaction explains most of the $6.3 million in cash used by financing it.
Finally, our financial position remains solid. As of November 30, 2023, net cash and overall liquidity position stood at $26.4 million and $97.5 million, respectively.
We believe our strong liquidity position, along with future cash flows from operations are sufficient to meet all financial obligations and satisfy projected working capital requirements, while allowing Velan to execute its business strategy by capturing profitable growth opportunities that may arise. I will now turn the call back over to [ Frank Ryder ] to kick off the Q&A session.
[Operator Instructions] [Foreign Language]
We have a question from [ Alex Ciarnelli ] from SM Investors.
I have a few, if I may. The first one is on the Flowserve broken deal, since you brought up. How did the process come around? Was it like a part of the process actually, or they just came and knocked on your door and again unsolicited the bid?
Yes. It was a process. It wasn't an unsolicited bid. The Board took a decision prior to, to look into potential strategic options. This involved reaching out through our adviser to numerous equity and other investors to which Flowserve was ultimately chosen as, among the crop, the most advantageous and likely to preserve and grow off of our legacy. So it was a process, not a knock on the door.
Fair. I think in a recent article, you were talking about tightening the integration of your capabilities to drive business. And if you can give some color on what you mean by that?
Integration of the businesses. Yes, I think what we're looking at here is we've got tremendous strength and capabilities around the world. We referenced to Italy, for instance, it's a tremendous success in the end of the third quarter and strength into the fourth quarter.
We think there's a better opportunity to exploit our competencies, market product, manufacturing, in a more integrated fashion around the world than we've traditionally done in the past. Often, if you look back at Velan in the past, the international operations in France and Italy were much more autonomous, which we think there's some strength in keeping that in place.
But we don't know that we fully recognize the value of the synergies as a global company. So that's what we're looking at, to try and drive more benefit out of looking at the business globally.
The brand is a preeminent brand globally. Our activities do exploit the brand [indiscernible] as well.
Okay. I guess that also answer most or partly my third question, which is one of the goals is to increase margins, which I'm assuming is a function of global volumes, and I guess, I see admin costs coming down as we look at your provisions. And then you talked about the capability integrations. Are there any other levers you're looking at?
Yes. Certainly, we're looking at -- you mentioned operating expenses. We're looking at ways to reduce further operating expenses in line with our preparations for top line growth, and redeploy some of the spending in the areas, currently into areas that will drive more growth and product development.
I think there is some opportunity for us also to further exploit, if you will, our position in India, with respect to greater collaboration there. We've long had engineering capabilities in India that work very well with the Montreal Group, and we want to see that continue to grow and thrive into the future.
And just -- sorry to ask you this, but I don't remember what is the percentage of revenues of MRO? I don't think you disclosed it though?
For consolidated MRO?
Yes, consolidated.
Yes. I'd say, 10%, 15% consolidated for the company.
This is another great question because at 10% to 15%, given the installed base we have, we should be exploiting that position more. So this is an area of focus for us as well for our own spares.
As you know, typically, margins are generally better with MRO and spare [indiscernible]. We think we've got some great opportunity to, as I say, further exploit the installed base that we have called.
Great. And then lastly for me, at the moment, the search of the CEO, how is that going?
The Board has a long-standing succession plan in place. And when the prior, Bruno, left, of course, we were able to move quickly to fill that position with me. We had a the Board meeting yesterday.
Yes. Perfect.
Yes. Okay. So as the processes are going, we expect we'll have those in the near term on that front.
[Operator Instructions] [Foreign Language]
There are no further questions at this time.
Very good. Thank you, Frank. We appreciate your help with this. And thank everyone who listened in to the earnings call. We look forward to reporting again at the conclusion of our fiscal year after February. Thank you again. Have a wonderful day.
That does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your line. [Foreign Language]