Velan Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 17, 2024

There are 4 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Valan Inc. Q4 Financial Results Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Friday, May 17, 2024.

Operator

I would now like to turn the conference over to Rishi Sharma. Please go ahead.

Speaker 1

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 section mentioned that the presentation provides an analysis of our consolidated results for the Q4 fiscal year ended February 29, 2020. The Board of Directors approved these results yesterday, May 16, 2024.

Speaker 1

2nd paragraph refers to non IFRS 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 that 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.

Speaker 1

Dollars unless indicated otherwise. I now turn the call over to Mr. Jim Manavak, CEO and Chairman of

Speaker 2

Board. Thank you, Rishi, and good morning, everyone. It's nice to join you again. But on standards, fiscal 2024 proved to be generously less than an optimal view. We're smart by challenging global economic and environmental disruptions.

Speaker 2

But for us, I think perhaps you need to play the distractions caused by the sale transaction that, as you know, terminated with the failure of French to approve the transaction. The result was that it's very distracting to our company and diverted us from full attention to execution of our strategic plan. Nonetheless, adjusted EBITDA totaled $17,800,000 on sales of $346,800,000 All figures were however below prior year. We're highly encouraged though by sequential increases in bookings in the 3rd Q4 and trend that's frankly continued into the Q1 as well. As a result, our order backlog at the end of the year stood at $491,500,000 Nearly 3 quarters of that backlog is expected to be shipped within the 12 month period.

Speaker 2

Richard will provide you with more details in his financial review, but I want to emphasize that we fully expect the land to return to growth mode in fiscal 2025 based on our strong booking momentum and our corporate culture. Go to Slide 5. As Chairman of the Board and newly appointed CEO during the past year, I embarked on a tour to gauge the perception of employees, customers and partners towards our company. I returned to Bolton by what I heard strength of our brand, quality of our products, our positioning in the marketplace and above all the dedication and skill of our people to assure we remain second to none in our market. We're a global company with headquarters in Canada, not merely a Canadian company with overseas operations.

Speaker 2

We have R and D centers here in Montreal as well as in France, Italy and India, each developing innovative technologies to improve the performance and reliability of our valves to the benefit of our customers worldwide. Our research hubs are supported by 12 manufacturing facilities and 2 distribution centers. We view our global footprint as a strong competitive advantage in terms of offering a diverse and relevant product portfolio at scale and in a cost effective manner. Let's turn to Slide 6 for an overview of our key growth markets. Looking ahead to fiscal 2025 and beyond, we plan to increase our reach in the high growth sectors like nuclear, defense, oil and gas as well as liquefied natural gas or LNG.

Speaker 2

These are niches in which we have a sustained differentiated advantage and are currently buoyed by energy transition trends. Going deeper into the environmental matters, many of our customers have stated carbon emission reduction targets such as reaching net 0 global carbon dioxide emissions and are increasingly looking for energy efficient solutions to reach these objectives. 1 is directly aligned with this subject grows as we have dedicated significant resources to environmental driven solutions for many decades. We're particularly heartened by evolving sentiment of our nuclear power as it's critical to reducing greenhouse gas emissions due to its clean properties, namely 0 emissions and fully recyclable. Two recent landmark events, the COP 20 Climate Change Conference and the Nuclear Energy Summit heralded a new era of cooperation to include nuclear energy effects of renewables to reach net zero emission objectives.

Speaker 2

As Alon, our balance are the power industry's choice for reliable nuclear service, posting significant installed base nuclear power reactors worldwide, over 50 years of uninterrupted experience. We are the leading valve supplier for all nuclear reactor technologies in the valve space. Our expertise can be leveraged into smaller and into small modular reactors at SMRs, which are increasingly gaining traction due to their reduced footprint, savings on cost and construction time and greater safety. Belan's long standing experience in defense markets, particularly nuclear, marine and aircraft carrier propulsion provides us with a leg up on the competition. For example, given tight space considerations, marine reactors must be physically smaller to generate hotter power per unit of space than land based reactors.

Speaker 2

Bausage is subject to greater stress and must endure harsher conditions at Citi and Shorway. Our insurance position in defense markets makes us the ideal supplier for the growing SMART niche. As for oil and gas, it's been widely affected by global efforts to mitigate climate change and protect the environment. Accordingly, we intend to leverage our extensive customer base, which includes most North American refineries as well as a growing presence overseas by providing engineered valves and steam traps that are most reliable in the market. Likewise, Long offers the most complete and technically advanced product line for LNG.

Speaker 2

Known as the cleanest of all fossil fuels producing 40% less CO2 and coal and 30% less than oil. Please turn to Slide 7. The solid underlying fundamentals were well positioned to drive sales and cash flow growth. The $4,000,000 in cash flow from operating activities reported in fiscal 2024 understates our real potential. From our operating standpoint, we've implemented a series of actions to drive cash by leveraging the full scale of our business, maximizing strategic procurement advantages and importantly optimizing our inventory management.

Speaker 2

Grooming our cash flow will bolster an already solid financial position for the company. We closed fiscal 2024 with a positive net cash position, providing the company with a distinct advantage in a high interest rate environment. Given this advantage, we're on solid ground to actively seek growth opportunities to further expand our reach in new market niches and consolidate our leadership in existing ones. Given my dual role as Chairman and CEO, a position on our Board of Directors was left vacant. I'm very pleased to report that Daniel Desardins has recently been appointed to our Board as an independent director.

Speaker 2

Daniel is an accomplished business lawyer and executive with extensive expertise in business law, clients and risk management as well as decades of experience in financing HUGS Mergers and Acquisitions at Bombardier. His legal and business acumen along with outstanding knowledge of global markets nicely complement the skill set of the Board. Certainly look forward to his contributions going forward. In closing, I'm very thankful for leading such a high quality leadership team here at Alumna. Through the collective contribution of our leaders, along with the tireless work of more than 1600 employees worldwide, our brand remains revered throughout the industry.

Speaker 2

Consequently, I'd like to take this opportunity to sincerely thank our employees for the dedication of Mercedes during what can at best be described as an unusual year from which we are now truly rebounding. At this point, I turn the call over to Rishi for financial review. Rishi?

Speaker 1

Thank you, Jim. If you could please turn to Slide 9. Medline's consolidated fiscal 2024 solid 4th quarter results. Strong bookings also raised the value of our backlog to $491,500,000 at year end, representing a sequential increase of 6,500,000 dollars since the Q3 and more than $27,000,000 over the course of the year. 4th quarter bookings amounted to 132,800,000 dollars up sequentially $78,300,000 in the 3rd quarter.

Speaker 1

Our Italian operations recorded very strong orders from the oil and gas sector and we also recorded higher orders at our North American operations. These were partially offset by the timing of orders in France that followed strong bookings in last year's quarter. The book to bill ratio for the quarter was 1.13. For the year, the ratio was 1.08, which represents the best performance in over 2 years when considering enrolling 12 month bookings and sales as shown at the bottom graph of the slide. Turning over to the income statement on Slide 10.

Speaker 1

4th quarter sales reached $117,900,000 up from $150,000,000 in Europe. The increase mainly reflects strong shipments from our international operations, particularly in Italy and China. A stronger euro average rate against the U. S. Dollar also had a $1,700,000 positive impact on sales.

Speaker 1

These factors were partially offset by lower shipments from the North American operations and delays caused by the political tensions in the Middle East, which affected shipping traffic in the Red Sea. Moving on to Slide 11, which shows gross profit of $38,400,000 compared to $39,900,000 last year. This decrease is mainly due to a less favorable mix this year compared to last, reflecting the execution of certain low margin projects during the quarter. Last year's gross profit also benefited from a favorable revaluation of the inventory provision. As a percentage of sales, gross profit was 26.9% compared to 30.4% last year.

Speaker 1

Administrative costs were $33,100,000 this year versus $80,800,000 last year. However, asbestos related provisions materially affect the comparability between the periods. We periodically estimate the impact of future asbestos settlement claims. In the past, the provision only reflected known claims, but following an actuarial study, we took $56,000,000 provision in the Q4 of fiscal 2023 to also reflect future claims not yet made. In this year's Q4, we made an additional $10,000,000 adjustment to true up the provision based on the latest estimates of amounts that may be paid.

Speaker 1

Excluding these provisions as well as restructuring costs, administration costs amounted to 21.7 $1,000,000 or 18.4 percent of sales in the Q4 of fiscal 2024, down from $24,900,000 or 21.6 percent of sales last year. The improvement is mainly due to lower expenses in our North American operations and cost reduction initiatives throughout the network. EBITDA was $8,500,000 for the Q4 of fiscal 2024 compared to negative $39,500,000 last year. Excluding the provisions and restructuring charges, adjusted EBITDA stood at $19,900,000 up from $16,500,000 last year. Net loss totaled $2,100,000 or $0.10 per share compared to a net loss of $47,200,000 or $2.18 per share a year ago.

Speaker 1

Excluding the after tax effective provisions and restructuring expenses, adjusted net income was $8,900,000 or $0.41 per share, up slightly from $8,800,000 last year. Moving on to cash flows on Slide 12. Cash provided by operating activities was $19,600,000 in Q4 of 2024, up from $18,500,000 last year. The increase is attributable to higher EBITDA positive changes in non cash working capital movements, partially offset by unfavorable movement in long term provisions. Finally, our financial position remains very solid.

Speaker 1

As at February 29, 2024, cash and cash equivalents stood at $36,400,000 and we also had $5,300,000 in short term investments as opposed to $28,800,000 in 20. We believe our strong liquidity position along with future cash flows generated from operations provides Valium with the flexibility to meet its financial obligations and projected working capital requirements, while continuing to execute its business strategy and see profitable growth opportunities to further expand its global reach. In conclusion, on Slide 13, given our solid order backlog of which nearly 3 quarters should be delivered in the next 12 months, we expect fiscal 2025 annual sales to exceed those of fiscal 2024. I would now like to turn the call over to the operator for the Q and A session.

Operator

Ladies and gentlemen, we will now begin the question and answer Your first question comes from Alessandro Ciarmoli with SM Investors. Your line is now open.

Speaker 3

Hi, good morning.

Speaker 2

Good morning, Paul.

Operator

I had

Speaker 3

a few questions, if I may. So the backlog, that's a great number. I'm just wondering, since you're talking about gross margin, the mix was a bit negative not negative, sorry, but a little bit lower than last year. How's the backlog mix in terms of gross margin? How do you see that one?

Speaker 3

And then tied to that, how's the MRO business penetration within the backlog?

Speaker 2

Yes. The MRO within the backlog specifically. Let's turn our attention first to your question about profitability of the backlog. It's the way we track the profitability of the backlog, it's in line with our historic averages, perhaps that Bob actually as Rishi commented on. In the Q4, we cleared some shipments that had historically lower profit margins than what we've seen.

Speaker 2

So we expect as I said as we look at the backlog that we should be in good shape in terms of profit and backlog. MRO in general has been slow throughout 2024. And now we're speaking most specifically on the U. S. Market.

Speaker 2

We've seen a rebound towards the end of the Q4 and continued strength in the Q1. So we do see hopefully we've reached the bottom of the destocking programs that affected many companies, not just ours in the industry. And our channel partners are replenishing their position. So we're seeing strength in Amaro, as we said, through the Q4 and certainly into the Q1.

Speaker 3

Thank you. And you spoke about the nuclear opportunity. A lot of talk about nuclear type of data centers to the electrification in general. How do you see this long term opportunity? My understanding, if I remember correctly from an article that I read, you guys provide the amount, the majority actually, you can't provide the majority of valves that go into the core of a reactor.

Speaker 3

So assuming there's a huge demand, are you able to fulfill that? I think okay, go on.

Speaker 2

Yes. It's a great question. I commented in my remarks about our global footprint. If we turn to operations in France outside of Paris as well as Lyon. I was just over there a couple of weeks ago and reviewed the capacity directly related to your question coincidentally.

Speaker 2

And we're comfortable that the growth that we see on the horizon through key customer PDF and trends, we'll be able to match that growth with our capacity. In Canada and the U. S, we have significant capacity in our operations here to absorb that growth that you speak of. Keep in mind also that with nuclear, the delivery times from the time, let's say, you see the order to the time you're actually shipping are quite extended compared to the rest of our order backlog. And so what that does is gives us an opportunity to more effectively and efficiently plan capacity and identify capacity constraints as we go forward.

Speaker 2

So we feel very comfortable we'll be able to meet demand. And as you rightly put, we're in a very, very good position to enjoy the growth that we see escalating in the coming years.

Speaker 3

Thank you for that as well. I read the article that was posted on your website from Bob Ward, very interesting. There's a reference to a joint to a possible joint venture, actually to a joint venture in the Middle East. How would that work? How are you accounted for on your financial statements, CapEx and things

Speaker 2

like that? Yes. Rishi, why don't you talk about the accounting of the joint venture?

Speaker 1

Yes. So it's a joint venture out of our Italian operations with a partner in Saudi Arabia. We own 60% of partners 40%. With Control, we would be consolidating those results into our Italian operations and then upwards and upstream into Vale, Inc.

Speaker 2

And as you probably know in the Middle East and that's not unique, I guess, in that part of the world. More and more of the countries are requiring some kind of local presence for suppliers such as us. And we're happy to have a good, very good joint venture partner. We're in the final stages of qualification of the operations and expect some good growth developed from our presence with that joint venture. And it may not be the only one that we enter into in the coming years to address the market demands.

Speaker 3

Then if I may go on with questions. I was in that article, you're talking about the opportunity of industrial in terms of things, out of it with monitoring the quarter valve with the V Flange. If you want to give any other color, how you see that opportunity?

Speaker 2

So the beef flange specifically has been developed in our ABB operation, Italy. It's a very clever innovation, I should say. In that most of the valves, if you think about the deployment in oil and gas or any kind of process, most of the valves are monitored. They're on off valves often, mechanical valves that the operator or owner doesn't really have visibility to developing problems with the valves or how they're functioning or even up or downstream activities that may affect their overall process. The V flange addressed this by pulling vital information out of the valve just based on its performance in this terezus.

Speaker 2

So we're excited about that. We think we'll launch into the market in this coming fiscal year actually. So we're in good position I think to exploit the developing demand for smart valves, which I've been talked about for many, many years. And I think the technology as it continues to improve enables its advances much more effectively and efficiently than perhaps the vision of the past is not the reality of the future. So we're very pleased with this development and look forward to exploiting that in the marketplace and improving our presence with our customers.

Speaker 3

And I'll go just one second. Yes, best is the number, the same to you, a little more $1,000,000 that is a gross number. I know it's an estimate. I understand the different variables are going to an estimate and might change. But is there any assurance attached to that, that will make your payouts lower?

Speaker 1

So in the financial statements on essentially in the cash flow section on the notes, you'll see that there was $9,500,000 paid for indemnity, which is real settlement severities, which is a long term provision. Within our S and A costs, we have about $1,500,000 of legal. The $10,000,000 adjustment was to the long term provision itself, so that's a noncash adjustment. The estimate there is really based on a series of variables and hypotheses that indicate that over the term of this liability existing, there'll be about $10,000,000 more that will need to be paid out.

Speaker 2

Yes. And I think it's important, Rishi, to underscore that last point. The adjustment or true up of the reserve at the end of the year based on the latest actuarial studies, the runoff of decades into the future. So I think that when we booked the reserve that Rishi talked about at around $50,000,000 last year, it gives us more predictability and stability in earnings. But you're still going to see these annual true ups, but you have to keep in mind in terms of your question about the actual cash burn, You're trying to project things that are going to happen 30 years into the future.

Speaker 2

So there's some variability given the movement of the underlying assumptions. So you should expect that going forward. But I think on balance, the book in the reserve to the balance sheet will give us as I said more stability and predictability in earnings over the long run.

Speaker 3

And there was that little situation with the mortgage, which my understanding is already reversed. Just wondering how that works in the sense, why didn't you just pay it down if you have the cash or just at the moment doesn't make sense, you want the cash and working capital, etcetera?

Speaker 1

Yes. So I think you're referring to the asset backed mortgage. I mean the rates are very favorable for us over a very long term horizon. I think those take us out to 2,034,036. And in terms, as you mentioned, the compliance, we're in compliance.

Speaker 1

We have the alignment with the lender. It's a very short term thing. And basically in our Q1 results, which we'll be getting ready for in the next 2 weeks, that portion of the long term debt that was classified to short term will be put back to long term. So they're mechanical. There's no issue there.

Speaker 1

The cash that we have on hand is 36.5 plus, call it the 5.4 of short term investments. For us, the purpose and use of that liquidity is really the working capital and reinvesting in the business for some of the growth strategies that Jim spoke about here.

Speaker 3

And my last one, which is more of keeping this quote. And for acquired family reasons, I mean, Montreal often, Would you guys be open for me to come and visit and sit down with you guys, understand even better your company if I reach out beforehand?

Speaker 2

Well, we're always pleased to entertain visitors and quite probably the operation. So yes, we can organize the calendar. We'd be delighted.

Speaker 3

I see on the website there is a phone number and email. So I just reach out to those 2?

Speaker 1

Just call me and we'll arrange this.

Speaker 3

Okay. Thank you so much. Thank you.

Speaker 2

Sure. No problem.

Operator

There are no more questions at this time. I will now turn the conference over to Jim Mannebak. Please go ahead.

Speaker 2

Thank you. We appreciate you all for joining us today. I hope the Canadians on the call had a wonderful holiday weekend, and we look forward to sharing

Speaker 1

our Q1 results with you

Speaker 2

for 2025 in July. Have a great day. Thanks again.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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Earnings Conference Call
Velan Q4 2024
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