Bonjour et bienvenue à la conférence téléphonique. Présentation des résultats du quatrième trimestre de l'année fiscale 2022. Greetings and welcome to Velan Inc. Q4 financial results. Pendant la présentation, tous les participants seront en mode d'écoute seulement. Une période de questions suivra la présentation. Vous pouvez demander les questions en français ou en anglais. Si vous souhaitez poser une question, appuyez sur un suivi quatre sur votre téléphone. During the presentation, participants will be in a listen only mode. Afterwards, we'll conduct a question and answer session. You can ask a question either in French or in English. At that time, if you have a question, you can press the one followed by the four on your telephone at any time in presentation. Si lors de la conférence, vous avez besoin de parler avec un téléphoniste, veuillez appuyer sur l'étoile suivi de zéro.
If at any time during the conference you wish to speak with an operator, you may press star followed by the zero. Nous vous rappelons que la conférence téléphonique d'aujourd'hui est enregistrée le jeudi dix-neuf mai deux mille vingt-deux. As a reminder, this call is being recorded Thursday, May 19th, 2022 . Je cède maintenant la parole à Bruno Carbonaro, chef de la direction et président. I would now like to turn the conference over to Bruno Carbonaro, Chief Executive Officer and President. Please go ahead.
Bonjour et bienvenue. Welcome to our investor presentation to review the results of the fourth quarter of the fiscal year 2022. I'm joined today by Benoit Alain, the CFO of the company, as I start by briefly presenting and commenting our results for the Q4 and the full year, and then giving you some elements on the outlook. We then will open the line for your questions. First, to start, the usual disclaimer. I'll let you a couple of seconds to review it. It's nothing new, but it's absolutely mandatory. Without further ado, let's comment on the highlights of the fourth quarter of the fiscal year. The sales are amounting to CAD 125 million, which is a big increase versus the same quarter of the previous year.
Some of it is linked, especially CAD 8.8 million of that, are linked to the reversal of some performance guarantees, but even if we exclude that, this quarter is the best of the company in the last five years. In terms of EBITDA, CAD 16.6 million, which is a big gap versus the CAD 1.6 million we reported for the same quarter of last year. Paradoxically, we report a net loss, which is surprising, but basically, as you may see on the slide, the big explanation of that is the re-recognition of CAD 32.6 million of deferred tax assets. In terms of backlog, we still have a very high backlog above CAD 500 million, even if you recall that our book-to-bill ratio is below one, so it's only 88%.
Basically I'll explain further in the next slides on that. To finish this, I want to comment on the strong net cash position of the company, which is above CAD 50 million, and at the same time, as I will explain later, we were able to reimburse a fair amount of our outstanding debt. Now, having a look at the EBITDA on the left of the slide, we have an historical view of the EBITDA on a quarter-to-quarter basis. As you see, that's the third quarter in a row where we can just report a very nice EBITDA. It's. There is a big contrast between what you see for 2022 and for example, what you've seen in 2018 and 2019.
Now to the right, we have given an explanation of the variance between the CAD 16.6 million of this year and the CAD 1.6 million of last year. I focus my attention on the two first bars. Basically at the same time, we increased immensely the volume and we maintained the margin, which is always complex in our business, not having to compromise on prices to make your volumes. Basically, we found a way to walk the thin line to be at the same time increasing the volume of our bookings and our sales, and also maintaining the margin at more than acceptable level. I'd like to comment on how we generate the cash because EBITDA is good, but cash is king.
You see to the left, you know, the transformation from EBITDA to free cash flow. CAD 6.7 of free cash flow out of an EBITDA of CAD 16.6. I would comment this performance as fair. It's not where I'd like us to be. You see the three, four bars that explain the variation of our working cap with a good performance on inventory that are still too high but are decreasing for the quarter. The AR that are increasing mainly with timing, you know, impact of our sales and the AP that are also decreasing which is not what we expected. Basically, rest assured that we are actually and currently working on that to increase the ratio, you know, of transformation from EBITDA to free cash flow.
To the right you have the usage of the free cash flow we have. You have the starting position in terms of net cash of CAD 68 million. Then you have the free cash flow, then you have the disposal of Juwon Steel Co. Ltd, and then you end up, you know, with the cash position which is CAD 60.5 million, out of which you have CAD 7 million of short-term investments. Technically it's not cash, but if we need to transform that into cash, it's easy. It takes some time, but there is no problem in terms of just transforming that into cash. Now let's have a look at the full year.
As mentioned before, the sales for the full year amount to CAD 411 million, which is the best number in the last five years. I'm very proud of the second bullet point, which is an increase of our gross profit of 610 basis points from 26.7%, which we said to 32.8%, which is good. You have a lot of effort behind this number and basically it gives you a sense of the health of the business at Velan. In terms of EBITDA, the figure speaks by itself, almost CAD 40 million of EBITDA, which represents $1.8 per share. It's more than double the result we published for last year.
In terms of loss, I already explained why we have a net loss which is linked to exceptional items. I think that it's important for to report to you that as a result of the good performance of the company financially and the healthy cash position, the board has approved an eligible quarterly dividend of CAD 0.03 per share, which was what we had in place two years ago. That we will reinstate something which was going, and I'm happy that we can share with our shareholders some of the value we created. Let's now move on to some element of perspective for the company. As I mentioned to you, the backlog is still healthy. About CAD 80 million. Book-to-bill ratio of 1.0, but it's not very low.
What is extremely important is the portion of the backlog, which is shippable in the like next 12 months. If you go to the right of the slide, you have the stack bar and the bottom part or the bottom portion of the stack bar are exactly what we can ship in the next 12 months. You see that it's about the same number as last year. Basically, what we are saying is that the backlog we have is sufficient for us to make decent numbers next year. Basically, it's good and we continue to have, I think, a good traction on the market for the bookings in the first 2 months of the year. To try to give some color around our bookings, as we did last time.
Last time we presented to you a job we acquired for a refinery in Egypt. We decided just to highlight here not a single project, but a very loyal customer that most of you know if you have been part of the valve industry in North America in the last 30 years. Their name is Sunbelt, and basically you can just have a description of who they are. I want just to emphasize the fact that it's the type of company we have a partnership with. Basically, what I call a partnership is shared efforts to promote towards the end customers the value of our product lines and our brand. Basically, you see that the efforts that we have together currently are around HFS valves and corporate product lines.
Basically, what is good is it's important for them, and we work together. It really is a good indication of the type of customer we want to favor in the future. We believe that the future of Velan is around our key customers, key accounts, and we put in place a very clear management of our key accounts to make sure that they grow with us, we grow with them. Basically we have a joint future and Sunbelt is obviously one of those loyal customers that we will help grow and that they will help us grow. On this page, which is pretty unusual, you see three pictures and you see two pictures for CFOs.
Basically it's normal because this Benoit Alain, the CFO in place, will step down in a couple of days as we have announced to the market in December. I want to thank him for what he did during his tenure, that a little bit more than one year, basically helped us modernize our filing processes and systems, and I can tell you that I see a difference now compared to one year ago. I'd like just to wish him well for the next step in his career, and I'd like you to welcome Rishi Sharma. He is an excellent complement to the team. As you may have seen, he has an amazing professional background and I know that he will tremendously help me and the company grow in the future. Now it's time for me to open the floor for any questions you may have.
Merci. If you desire to register to ask a question, please press one followed by four on your phone. You will then hear a tone indicating that your question has been registered. If any question has already been answered or you wish to cancel, press one followed by three. If you'd like to register a question, you may do so by pressing the one followed by the four on your telephone. You'll hear a three-tone prompt to acknowledge your request. If your question has been answered, to withdraw your registration, you can press the one followed by the three. Again, you can ask questions one, four. You can ask a question either in French or in English. Michael Dumay, Private Investor. First question, Michael Dumay, Private Investor. Go right ahead.
Hey, good morning, Bruno and Benoit. Nice quarter. My first question was really just maybe asking for a little bit more color, you know, a little bit of overview and general outlook on your specific end markets. You know, specifically, you know, how meaningful could the higher energy prices and MRO activity be for you in the near and medium term?
Okay. Just I can tell you have a question which is short-term and mid-term. Short-term, here we are in a very complex environment where we have a war just between Russia and Ukraine. When there is uncertainty, we're in a CapEx business, so basically any time there is an uncertainty on the market, even if, you know, when you see the prices of commodity going up, like oil, the price of energy going very, very high and then decreasing and, people thinking about recession, it's extremely difficult for decision maker to make decision around new projects. Basically what we see in, you know, end market, is we continue to have a high trend for MRO because it's basically maintenance or small CapEx jobs, and here there is traction on the market.
For anything which is major, which are large investments, it's a little bit complex for our customers to sanction their project, i.e., we see a lot of positions going out. We have a lot of position activity, but the timing of the projects are completely unsure. Basically, we knew last year that it would be soft and we were expecting some rebound on the market in Q1. To be honest, I think Ukraine is taking a toll on the ability of our customers to make that decision.
Okay. No, that's helpful. I appreciate the comments there. My second question is on the provision taken in the quarter relating to the ongoing asbestos litigation. You know, do you now think that you've fully provisioned for all future expenses? I'm just trying to make sure I understand the MD&A correctly, because it does feel like the number is relatively light versus maybe some of the prior expenses in the quarter. Just maybe provide context as to what we should expect going forward.
What I suggest is Benoit will answer, because it's very technical, and I want to make sure that, exactly, it's clear what we put in the MD&A. It's clear, but please, Benoit, could you elaborate on that?
In the asbestos, there's three components. There's the claims that we know we will settle, claims that we know the chance of settling is high. The third one is all the future claims. This year we took a more conservative approach versus previous year. You see the total expense for the full year is CAD 25 million asbestos. CAD 12 million is related to the same method as last year. Essentially we take a provision on the first category I mentioned. This year we decided to, as I said, take a more conservative approach and we took a provision on the first two. We still don't make any provision for future claim that we didn't receive yet. That's the current solution. This is definitely a lot more conservative than previously. Those numbers, those extra expenses are part of our EBITDA this year.
Understood. The expenses going forward should go down but not disappear. Is that the right way to think about it?
You're absolutely right.
Okay. Okay, thank you. Then, I guess I'm gonna ask one more. I don't know if there's anybody in queue, but I'll ask a couple more. You know, in terms of the balance sheet and the cash flow, you know, nice to see the improvement in the ARs. You still have 180 days in inventory. I mean, that's your inventory position is actually larger than your market cap. Any way you can give us a sense for, you know, what the longer term objective is in terms of getting the inventory and the working cap in the right place? Just, I guess, the time it'll take to get there and the final destination.
Yeah. I'll explain. The question is very relevant, so thanks for asking. Basically, it's a little bit complex for us to stabilize and decrease our inventory at the moment where we have difficulties to ship. Basically, we still are impacted by the impact of COVID-19. The difficulty to get our goods out of China and India. A lot of our customers just finding reasons not to take possession of the goods. Basically, in the inventory, what is important is to go a little bit deeper on what's, you know, raw material, what's finished parts, what is WIP and what is finished goods. I can tell you we are spending a lot of time on that.
Basically, what we hope is that when we finish with the high repercussions of, you know, the COVID-19 and the war in Ukraine, basically, we will be in a position to reduce immensely, and I think that it's or sizably, if I made it precise. The problem is to do that, and to do that not only in North America but all over the world, we need to put in place a project and that could be led by Rishi, and basically takes his time. So don't expect, you know, a miracle in the next first quarter. Basically, it's definitely a long-term objective for the company.
To give you an example, you know, on the variable cost structure of our company, not only in North America, but also outside, we introduced, you know, the cash conversion and working cap as one of the key elements we based our viability on.
That's helpful. Thanks. I guess just an extension to that, I mean, you know, nice to see the dividend reinstated. You know, it looks like profitability has moved, you know, thoroughly in the right direction. Cash flows are getting better. You know, the balance sheets, you know, I'd say more than sufficiently capitalized. How should we think about, you know, additional capital deployment going forward, what your thoughts are in terms of return to capital versus, M&A?
It's a very broad question. You know, that's the, yeah, it's a little bit complex for me just to interpret it to be extremely precise on what I would be saying. The good news is we generate cash. The good news is we're in an industry where you have a lot that is going on. Basically, not only are we generating cash, but our profitability is good. We must all be among the people that can set the tone in the industry. How, when it's completely unclear. Basically, the good news is now we can have our, you know, destiny in our hands, and it's much more convenient than most only a couple of years ago.
Yeah, I would agree. Nicely done the year.
We have a lot of other people that have helpful questions. I don't know how to manage that, but I don't want just people being frustrated by only having one person discussing with me. Sorry to be rude, but I see that I see questions on the Q&A. How do we proceed? I don't know. Should we?
What I suggest, Dumay, if we can move on and
Move on. Yeah.
Michael, if you have other further question, maybe go back on the queue to let the chance for other people, please.
Thank you very much. We'll proceed to our next question. The question comes from the line of Stephen Takacsy at Lester Asset Management. Our next question from Stephen Takacsy , Lester Asset Management. Go right ahead.
Yeah, sorry, can you hear me?
Yes.
I also sent them through the chat. The first question was what are the normalized margins when you back out the revaluation of performance guarantees and the Canadian wage subsidies for the quarter and also for the year? That would be my first question.
It's about an impact of 5% for this quarter. When you look at our gross margin of 38% versus 27% last year, and if you take out the CAD 8.8 million, it would give you about 32%-33%.
Okay. Is there still some Canadian wage subsidy in this, in the latest quarter?
No.
Okay. Zero in the quarter. When you're referring in your MD&A to less wage subsidies this quarter, they're actually zero both in the cost of goods sold and in the SG&A, correct?
Yes.
Okay. The other question is, yeah, and you sort of touched on it a little bit, but are you facing some, because you have operations in China and clients in China, are you facing supply chain issues there or elsewhere currently?
Yeah. We still have, you know, the conviction in the port of Shanghai, which is completely congested. It touches at different levels. First is, yeah, in the actual, you know, supply of goods coming from China. Also, you know, now there are more competition in supply chain that is moving to India, so it's more difficult also to get our goods from India, even if there is no port congestion, but basically they are just overwhelmed by the workload.
The third thing is it has an impact on the bookings because basically as there is difficulty to get access to goods and that the pricing are changing from one day to the other, it is extremely difficult just, you know, to find an agreement with the customer on the price of the day. Basically, yeah, we are continuing the supply chain and the price increases and decreases of the commodities has an impact on the performance of the company and still has.
Right. Are you still, like, what's the margin objective? Are you still trying to maintain margins in the, you know, gross margins in the 30%-35% range? Is that a fair assessment?
Here we reported, you know, last time we discussed about our different markets and basically intrinsically our five BUs have different targets. Depending on the mix, you know, it could change. Because basically, you don't have the same for MRO or SBU. I give you two extremes. Basically, what we expect is that we will maintain for on a BU per BU basis, the same gross margin this year than last year. Then you have the mix effect that I won't comment on.
Okay. Sorry. I missed that. You're trying to maintain the what? Sorry.
You know, we have five strategic markets, but I'm saying if a strategic market has a target of 25%, let's say last year, our target this year is to maintain or to exceed this 25. Because the 25 is a combination of higher margin-
Prior year's margin on each market.
At the moment, it is all businesses. That was my point. Sorry if that was not clear.
Okay. Finally, you know, I appreciate the dividend, but it's very paltry, and it, to me, doesn't add any value to the shares. You know, why aren't you buying back your grossly undervalued shares, which would be much more accretive to all shareholders than reinstating a dividend? It makes no sense to me.
Most probably, that's the board that should address this question. I'm not sure I'm qualified just to do that. The good news is that the board approved the dividend, and I think it's, it goes in the right direction.
A better use of capital would be to be buying back your shares, which are trading at less than liquidation value, as a prior question pointed out. Okay. Thank you.
Thank you very much. Ask any other questions or comments. Could do so now by pressing your 1 4 on your telephone keypad. Our next question comes from Jean-François, private investor. Go ahead.
Est-ce qu'on pourrait savoir quelles sont les juridictions qui sont les plus, c'est que les pertes ont été, comme les pertes comptables ont été prises le plus, de manière le plus importante?
Non, on rapporte pas l'information par juridiction.
Ok, parfait. Dans le sens, sont pas perdus d'un point de vue comptable, si un jour la compagnie fait des profits dans une certaine juridiction, elle va pouvoir les utiliser contre les pertes.
Tout à fait.
C'est toujours d'un point de vue fiscal.
Tout à fait. Ce ne sont pas des pertes qui sont venues à échéance et qu'on a perdues.
Des fois, il y a des différences.
C'est pas le cas ici.
OK, parfait. Benoit, je vous remercie beaucoup.
Merci d'avoir
Merci. On a une autre question encore une fois de Stephen Takacsy de Lester Asset Management. We have another follow up question, Stephen Takacsy from Lester Asset Management. Go right ahead.
Merci. Just a follow-up question to the previous gentleman's question on the asbestos litigation. If I understand correctly, of the CAD 25, you said CAD 12 is by the previous method of claims that are settled during the quarter and then CAD 13 million is a provision for future claims. To follow up on the same line of thinking as the previous question, if you receive a new claim, is that gonna be automatically expensed or is it just if the accountants feel that that claim needs to be provided for? In other words, the CAD 13 million that you've provided for, is that all the future claims that have been issued against you or those are just the ones that are the most likely to be settled? Because if you get another claim tomorrow morning, is that gonna suddenly show up in the P&L for the current quarter?
Actually, there's nothing, no provision for future claims. It's just that before we were taking a provision for claims that we were sure to settle. Now, we take a provision for all the claims that we have.
That'll be every quarter.
Everything that is out so far.
As you receive, as claims are filed on an ongoing basis, because this has been going on for a long time, as you know, then those will automatically just appear during the quarter, whether they're, you know, justifiable or not.
Exactly.
All right. Okay. Merci beaucoup. You know, congratulations on the much improved results. I don't wanna be overly negative, but a lot of progress has been made with the turnaround plan and by your predecessors and by the current management team. You know, well done on that.
Thanks.
Thank you very much. Monsieur Carbonaro, il n'y a plus de questions en ligne. Je vous cède de nouveau la parole. Mr. Carbonaro, we have no further questions on the line. Back to you.
Ok. Thanks a lot for your attendance. Just to let you know that the presentation will be posted on our website in French and in English, so don't hesitate to refer to that. If you have any further questions, you know, our details, so you can just call us. Thanks a lot. Have a nice day. Bye
Merci beaucoup. Cela conclut la conférence téléphonique d'aujourd'hui. Nous vous remercions de votre participation. Nous vous demandons de bien vouloir décrocher. Merci et bonne journée. That does conclude the conference call for today. We thank you for your participation. Please disconnect your lines. Have a good day, everyone.