Good morning, ladies and gentlemen, and welcome to the Velan 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. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, May 17, 2024. I would now like to turn the conference over to Rishi Sharma. 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 section mentions that the presentation provides an analysis of our consolidated results for the fourth quarter and fiscal year ending February 29, 2024. The board of directors approved these results yesterday, May 16, 2024. 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 US dollars unless indicated otherwise. I now turn the call over to Mr.
James Mannebach, CEO and Chairman of the Board.
Thank you, Rishi, and good morning, everyone. It's nice to join you again. By Velan standards, fiscal 2024 proved to be genuinely less than an optimal year. We were smacked by challenging global, economic, and environmental disruptions. But for us, I think perhaps uniquely, the distractions caused by the sale transaction that, as you know, terminated with the failure of the French to approve the transaction. The result was that it was very distracting to our company and diverted us from full attention to execution of our strategic plan. Nonetheless, Adjusted EBITDA totaled $17.8 million, on sales of $346.8 million. Both figures were, however, below prior year. We're highly encouraged, though, by sequential increases in bookings in the fourth quarter, a trend that's frankly continued into the first quarter as well.
As a result, our order backlog at the end of the year stood at $491.5 million. Nearly three-quarters of that backlog is expected to be shipped within a twelve-month period. Rishi will provide you with more details in his financial review, but I wanna emphasize that we fully expect Velan 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 Montreal buoyed by what I heard. Strength of our brand, the quality of our products, our positioning in the marketplace, and above all, the dedication and skill of our people assured 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. We have R&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 two 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 at the fiscal 2025 and beyond, we plan to increase our reach into high-growth sectors like nuclear, defense, oil and gas, as well as liquefied natural gas or LNG.
These are niches in which we have a sustained, differentiated advantage and are currently buoyed by energy transition trends. Delving deeper into the environmental matters, many of our customers have stated carbon emission reduction targets, such as reaching net zero global carbon dioxide emissions, and are increasingly looking for energy-efficient solutions to reach these objectives. Velan is directly aligned with this circular growth, as we have dedicated significant resources to environmental-driven solutions for many decades. We're particularly heartened by evolving sentiment around nuclear power, as it's critical to reducing greenhouse gas emissions due to its clean properties, namely zero emissions and fully recyclable. Two recent landmark events, the COP 28 Climate Change Conference and the Nuclear Energy Summit, heralded a new era of cooperation to include nuclear energy as one of the renewables to reach net zero emission objectives.
Now, at Velan, our valves are the power industry's choice for reliable nuclear service, boasting a significant installed base of 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, or SMRs, with which are increasingly gaining traction due to their reduced footprint, savings on cost and construction time, and greater safety. Velan's longstanding 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 and generate higher power per unit of space than land-based reactors. Valves are thus subject to greater stress and must endure harsher conditions at sea.
In short, our entrenched position in defense markets makes us the ideal supplier for the growing SMR 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. Likewise, Velan offers the most complete and technically advanced product line for LNG. You know, this is the cleanest of all fossil fuels, producing 40% less CO2 than coal and 30% less than oil. Please turn to slide 7. The solid underlying fundamentals we're well positioned to drive sales and cash flow growth. The $4 million in cash flow from operating activities reported in fiscal 2024 understates our growth potential.
From our operating standpoint, we've implemented a series of actions to drive cash by leveraging the global scale of our business, maximizing strategic procurement advantages, and importantly, optimizing our inventory management. Improving 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 Desjardins has recently been appointed to our board as an independent director.
Daniel is an accomplished business lawyer and executive with extensive expertise in business law, compliance, and risk management, as well as decades of experience in financing complex 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 Velan. Through the collective contribution of our leaders, along with the tireless work of more than 1,600 employees worldwide, our brand remains revered throughout the industry. Consequently, I'd like to take this opportunity to sincerely thank our employees for their dedication and resilience 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?
Thank you, Jim. If you could please turn to slide one. Velan concluded fiscal 2024 with solid fourth quarter results. Strong bookings also raised the value of our backlog to $491.5 million at year-end, representing a sequential increase of $6.5 million since the third quarter and more than $27 million over the course of the year. Fourth quarter bookings amounted to $132.8 million, up sequentially, $78.3 million in the third quarter. 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 two years when considering a rolling 12-month bookings and sales, as shown at the bottom graph of the slide. Turning over to the income statement on slide 10, fourth quarter sales reached $117.9 million, up from $150 million a year ago. The increase mainly reflects strong shipments from our international operations, particularly in Italy and China. A stronger euro average rate against the US dollar also had a $1.7 million positive impact on sales. 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 $38.4 million, compared to $39.9 million 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. Administrative costs were $33.1 million this year versus $80.8 million 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 million provision in the fourth quarter of fiscal 2023 to also reflect future claims not yet made. In this year's fourth quarter, we made an additional $10 million dollar adjustment to true up the provision based on the latest estimates of amounts that may be paid.... Excluding these provisions, as well as restructuring costs, administration costs amounted to $21.7 billion, or 18.4% of sales in the fourth quarter of fiscal 2024, down from $24.9 million or 21.6% 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 $8.5 million for the fourth quarter of fiscal 2024, compared to -$39.5 million last year.
Excluding the provisions and restructuring charges, Adjusted EBITDA stood at $19.9 million, up from $16.5 million last year. Net loss totaled $2.1 million, or $0.10 per share, compared to a net loss of $47.2 million or $2.18 per share a year ago. Excluding the after-tax effective provisions and restructuring expenses, adjusted net income was $8.9 million or $0.41 per share, up slightly from $8.8 million last year. Moving on to cash flows on slide 12. Cash provided by operating activities was $19.6 million in the fourth quarter of 2024, up from $18.5 million last year. The increase is attributable to higher EBITDA and positive changes in non-cash working capital movements, partially offset by an unfavorable movement in long-term provisions. Finally, our financial position remains very solid.
As of February 29, 2024, cash and cash equivalents stood at $36.4 million, and we also had $5.3 million in short-term investments, as opposed to $28.8 million in total. We believe our strong liquidity position, along with future cash flows generated from operations, provides Velan Inc. with the flexibility to meet its financial obligations and projected working capital requirements, while continuing to execute its business strategy and seek profitable growth opportunities to further expand its global reach. In conclusion, on slide 13, given our solid order backlog, of which nearly three-quarters should be delivered over 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&A session.
Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Alessandro Ciarnelli with SM Investors. Your line is now open.
Hi, good morning.
Good morning.
I had two questions, if I may. So the backlog, that's a great number. I'm just wondering, since you were 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? And then tied to that, how's the MRO business penetration within the backlog?
Yeah. Yeah, 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 a bit up, actually, as Rishi commented on. In the fourth quarter, we cleared some shipments that had historically lower profit margins than what we've seen. So we expect, as 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. We've seen a rebound towards the end of the fourth quarter and continued strength in the first quarter.
We do see, hopefully, we've reached the bottom of the destocking programs that affected many companies, not just ours, in the industry. Our channel partners are replenishing their positions. We're seeing strength in MRO, as I said, through the end of the fourth quarter and certainly into the first quarter.
Nice. Thank you. Then, you spoke about the nuclear opportunity.
Mm-hmm.
A lot of talk about nuclear tied to 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 majority, actually. You can provide the majority of valves that go into the core of a reactor. So assuming there's a huge demand, are you able to fulfill that? I think that was your-
Yes.
Okay, go on. Sorry.
Yes, it's, 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, and we're comfortable that the growth that we see on the horizon through key customer, EDF in France, will be able to match that growth with our capacity. In Canada and the US, 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 receive the order to-
The time they'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. 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.
Thank you for that as well. I read the article that was posted on your website on ValveWorld. Very interesting. There's a reference to a possible joint venture, actually to a joint venture in the Middle East. How would that work? How would you accounted for on your financial statements, the CapEx?
Yeah. Yeah. Rishi, why don't you talk about the accounting of the joint venture?
Yeah. So it's a joint venture out of our Italian operations with a partner in Saudi Arabia. We own 60%, the partner is 40. With control, we would be consolidating those results into our Italian operations and then upwards and upstream into Velan Inc.
Yeah. And as you probably know, in the Middle East, and that's not unique, I guess, in this, 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 in fact, some good growth developed from our presence with that joint venture. And you know, it may not be the only one that we enter into in the coming years to address the market demands.
Then if I may go on with questions, always in that article, you're talking about the opportunity of Industrial Internet of Things, part of it with the monitoring, you know, the quarter valve with the V-Flange. If you want to give any other color, how do you see that opportunity?
Yeah. So the V-Flange specifically has been developed in our ABV 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 aren't 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 addresses this by pulling vital information out of the valve, just based on its performance and hysteresis. So we're excited about that, and 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, you know, have been talked about for many, many years. And I think the technologies that continues to improve enables these advances much more effectively and efficiently than perhaps the vision of the past is now 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.
And I'll go just one second. The asbestos, the number, the $70, little more million dollars, that is a gross number? I know, I know it's an estimate, I understand the different variables that go into an estimate and might change, but is there any insurance attached to that, that will make your payouts lower?
So in the financial statements, on essentially in the cash flow section on the notes, you'll see that there was $9.5 million paid for indemnity, which is real settlements that reduces the long-term provision. Within our estimate costs, you know, we have about $4.5 million of legal. The 10 million adjustment was to the long-term provision itself, so that's a non-cash adjustment. And the estimate there is really based on, you know, a series of variables and hypotheses that indicate that over the term of this liability existing, there'll be about $10 million more that will need to be paid out.
Yeah, 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, is a run-off of decades into the future. So I think that, when we book the reserve that Rishi talked about, of $50, around $50 million last year, it gives us more predictability and stability in earnings. But you're still gonna see these annual true-ups, but you have to keep in mind, in terms of your question about the actual cash burn, you know, you're trying to project things that are gonna happen 30 years into the future. So there's some variability, you know, given the movement of the underlying assumptions. So you should expect that going forward.
But I think on balance, you know, the booking the reserve to the balance sheet will give us, as I said, more stability and predictability in earnings over the long run.
And, there was that little situation with the mortgage, which then, as I understand, is already reversed. Just wondering how... How that works in the sense, why didn't you just pay it down if you have the cash? Or just at the moment, does it make sense, and you'd you want the cash, the working capital, et cetera?
Yeah. 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 2034, 2036. And in terms, as you mentioned, you know, the compliance, we're in compliance. We have the alignment with the lender. It's a very short-term thing. And basically, in our 2021 results, which we'll be getting ready for in the next two 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. The cash that we have on hand is $36.5+, call it the $5.4 of short-term investments.
For us, the purpose and use of that liquidity is we're really the working capital and reinvesting in the business for some of the growth strategies that Jim spoke about earlier.
My last one, which is more of Keegan's call, and, for acquired family reasons, I'm in Montreal often. Would you guys be open for me to come and visit and sit down with you guys to understand even better your company, if I reach out beforehand?
Well, we're always pleased to entertain visitors, quite a part of the operation. So yes, we can organize the calendar. We'd be delighted.
I see on the website there is a phone number and email. Should I just reach out to those two?
Yes. Just, just call me, and we'll, we'll arrange this.
I appreciate it. Thank you so much.
Thank you.
Thank you for my questions.
Sure, no problem.
Ladies and gentlemen, as a reminder, should you have a question, please press star one. There are no more, no more questions at this time. I will now turn the conference over to Jim Mannebach. Please go ahead.
Thank you. We appreciate you all for joining, joining us today. I hope, the Canadians on the call have a wonderful holiday weekend, and we look forward to sharing our first quarter results with you for 2025 in July. Have a great day. Thanks again.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.