Earnings Call: Q3 2021

Jan 14, 2021

Earnings release

Greetings, and welcome to the Vellin, Inc. Q3 Financial Results Conference Call. During the presentation, all participants will be in a listen only mode. Later, we will conduct a question and answer session. As a reminder, the conference is being recorded, Thursday, 01/14/2021. I would now like to turn the conference over to Josep Netanyard La Pavro, La Yves Le Duc, CEO. Please go ahead. Welcome, everybody, to our third quarter fiscal year twenty twenty one conference call. I'm joined today by Regent Saguy, our CFO and John Ball, our Executive Vice President, Global Finance. This is Regent's last quarterly call. As you read last week, he has decided to leave the company for reasons that are entirely personal that I will not comment on this call. The only thing I will say is that I'm very sorry to see it as on go. He has been with us a little short of eighteen months, but has accomplished a lot in the short period, contributing greatly to the d 20 deployment both in terms of ensuring we were on track financially as well as deploying the new financial systems as part of the modernization of the company, that important fifth lever of the V20 plan that I often allude to. Regent is a team player, and the operative teams regret he's leaving as well. The good news is that John Ball, soon to be interim CFO, once Regent leaves in a few days, is still with us. He's been our excellent CFO for over fifteen years, and no one will be worried about our finance operations during the time we recruit Regent's replacement. I'm very grateful to John for accepting to step back up again. So thank you, John, and thank you, Reginald, for what you've done, and above all, good luck and best of fortune in your new endeavors. I will start with a brief summary of our results, followed by a more detailed discussion of our outlook. We'll then open the line to your questions. Before I start, let me mention that it has been a year like no other where our employees celebrated the land seventieth anniversary by rising to extraordinary challenges. We had to learn how to drive bookings, run manufacturing operations, and carry out our transformation plan while coping with a devastating global pandemic. No book was ever written on this, but the speedy and decisive deployment of safety protocols across all our global sites is nothing short of exemplary. This fiscal year is not over yet with still important challenges ahead of us. But all things considered, there are several reasons to be impressed by our achievements to date. More on these during the conference call. So let's begin with our results. Net earnings and gross profit percentage. Net earnings amounted to $9,500,000 or $0.44 per share compared to a net loss of $800,000 or $04 per share last year. The increase in net earnings is primarily attributable to a 9,600,000.0 gain recognized on the disposal of one of our Montreal plants, something I announced would happen at the last quarterly call. I want you all that that disposal is a vital part of the North American manufacturing footprint optimization under the planning. The production of a disposed plant has been transferred within our remaining North American plant as well as our Indian plant, something that we were able to do faster than the original program schedule had foreseen. Our results were also improved by the recording of 2,900,000.0 of wage subsidies, which allowed us to avoid potential potentially significant layoffs that otherwise could have been necessary to blunt the finance of the pandemic, and that was the goal of the federal program that we were able to benefit from. This increase was partially offset by 1,300,000.0 unfavorable movement in income tax. Our gross profit percentage for the quarter increased substantially from 25% to 30.7%, an improvement of five seventy basis points compared to the prior year. The increase in the gross profit percentage, which made up for the lower sales volume, was primarily attributable to the delivery of the product mix with a greater proportion of higher margin product sales and from margin improvements resulting from the overhead savings brought by our restructuring and transformation plan. The increase is also attributable to the reversal of the $1,600,000 warranty provision due to a customer's withdrawal of this claim and the recording of $1,500,000 of wage subsidy. Order bookings, backlog and sales bookings increased by $70,400,000 or 72.4 percent compared to last year's third quarter. The increase is primarily attributable to the recording of many breakthrough orders. One, thanks to our strong market position in geographies where the economy remained relatively healthy last year, namely in China and Southeast Asia. For example, our Italian operations achieved a record high of 48,900,000 net new orders destined to the downstream oil and gas industry, while our French operations recorded 48,600,000 of bookings for the quarter, primarily destined to the nuclear market. With respect to our Italian operations that are centered in the upstream and midstream oil markets, the bookings performance in the fall is all the more impressive that we when we remember that the oil price was below $0 in April. As additional comment, the increase in bookings in the quarter was achieved despite another soft quarter in terms of MRO orders recorded in our North American operations. As a result, our book to bill ratio was a strong 2.34, bookings thereby outpacing billings that brought the company at the end of the period a backlog of 561,800,000.0. That's an increase of 155,000,000 or 38.1% since the beginning of the current fiscal year. This is the highest we've disclosed since November 2012. Sales amounted to $71,600,000 a disappointing decrease of 17,100,000 or 19.3% from the prior year. Sales were again negatively impacted by the reduction of nonproject orders recorded by North American operations due to the unfavorable market conditions triggered by the COVID-nineteen pandemic as well as the drop in the oil price, which affect our distribution channel. But shipments are also attributable to shipments decrease are also attributable to continued supply chain issues created by the COVID-nineteen pandemic as well as inefficiencies experienced in reconfiguring the Canadian plants under the V20 program that caused production delays. This decrease in sales was partially offset by increased shipments in our Italian operations, thanks to the delivery of previously delayed orders. Speaking now of our financial position, we continue to have a very healthy balance sheet, highlighted by a net cash balance of $73,000,000 at the end of the quarter. This $42,000,000 or 135.5% increase since the beginning of the fiscal year is attributable in part to the net proceeds obtained through the sale of our Plant 27 in Montreal, six months earlier than originally scheduled, along with the new financing we finalized over the course of the fiscal year and positive noncash working movement capitals, particularly in accounts receivable. The net cash per share at the end of the quarter was USD 3.38 or CAD 4.39. Our equity at the end of the quarter settled at CAD 298,400,000.0 or $13.82 per share. In Canadian dollars, our equity per share was $17.92 as at 11/30/2020, compared to our TSX share price at the close of business day on that day of $6.00 $6 indicating that our share price continues to be undervalued, and that, of course, is an understatement. Let me now turn to the story behind the numbers, starting with, of course, COVID nineteen. The pandemic has forced the business world to quickly adapt to a completely new, extremely challenging environment. Here is how the land has reacted. But as a reminder, our footprint almost matches perfectly the itinerary of the early virus outbreak with plants in China, Korea, Northern Italy, France, India, The US, and Canada, as well as in Portugal and Taiwan, where we had to react very fast, probably earlier than most companies. We're a supplier of critical equipment to central industries, so in that sense, we're spared the most devastating impact of the crisis, but we could not avoid the consequences of the lockdown in our Indian supply chain that has affected for a good part of the year the production flow in many of our plants. Milan was very quick in implementing sanitary measures, social distancing, health surveys, protocols in case of outbreaks, etcetera. And so far, our record at maintaining as safe a work environment as possible is something I'm very proud of. No plant closure as a result of infections contracted at work. Nina, while we're seeing how safeguards can be raised even further as we need to remain extremely vigilant now that we're deep into a second wave of resurgence of COVID nineteen almost everywhere in the world. Now make no mistake. No matter how good we are in deploying safety protocols, no company escapes the impact of the pandemic. For example, quarantines happen, as precautionary measures in cases where employees report having been in contact with infected people at home or outside work. So the question is how good one can be at constantly mitigating the impact of the crisis in one area where we've been particularly effective is managing our costs. We found ways to pursue the deployment of our B-twenty agenda with far reduced expenses and resources, and if you remember, even deployed a temporary salary reduction program for a few months. On that point, note that based on our strong bookings performance and our success in eliminating structural costs and improving margins under our b 20 plan, we decided to restore the salaries on December 1. The business situation is very similar to what I reported at the last quarterly conference call, so the main headlines remain the same. Let me remind you of them by underlining the most recent developments occurring in the quarter against each of those highlights. Highlight number one, great progress in deploying the v 20 plan, which we've accelerated with fewer resources and plans. So here, a notable development here is that the results in the quarter were helped by the sale of plan two seven in Montreal, six months earlier than originally planned, and I add that we got a very good price for the sale. Second highlight, business health sprang forward this year as we're realizing the benefits of our d 20 plan in a very impressive way. That's evidenced by a substantial reduction in production overhead and even more encouraging in the impressive increase in project margins. Last year, to explain why we were seeing a reduction in project bookings, if you remember, we which we anticipated to be a temporary factor, we've actually become a lot more selective in project bidding, and our sales and quotation teams carefully apply a new pricing discipline, which is helping our margins. As a result of this more disciplined approach, you will see our margin fueled by a much better mix in our project manufacturing business. And it's now a trend as we're seeing margin getting the margins getting better every month. A reminder that the improvement of our margins of our North American operations was one of the key goals of B20, and I can confirm today that, that goal is being met. Highlight number three, a surge in bookings. Q3's performance is standing out as one of the best bookings quarters in Valens' recent history, owing in part, again, to our more focused approach to market that was put in place as part of our V20 strategy. In that regard, every single subsidiary has contributed to a truly remarkable year in bookings in North America, Europe or Asia. It's true that the global recession has hit our MRO business the hardest, deeply affecting our non project orders. But our four other strategic businesses are thriving, having grown our backlog by 40% to its highest level in over eight years with many breakthrough orders, one thanks to our strong market position in Europe, Middle East, India, Southeast Asia and China in the nuclear, petrochemical and oil production sectors. One element of V20 that remains to be successfully completed is the shift in our manufacturing model towards achieving leaner and more agile operations in North America. That's an ongoing initiative, and we're not there yet. The shift requiring new processes and adaptive capabilities along with COVID driven disruptions, the move of machinery, the accelerated closure of Plant 27, all of this combined in causing production delays in our North American plants, and this is going to be a key area of focus in the months to come. To conclude, there's going to be a strong short term focus in the next months as the uncertainty caused by indefinite global economic crisis persists. And as I just said, we need to address our production challenges. On the other hand, we are armed in North America. On the other hand, we are armed with a near record backlog and growing margins. We have gained a lot of headroom and are now turning a lot more attention on our growth strategy. As I keep reminding our employees, we should aim to get out of the storm stronger than before it hit the world economy. And thanks to their unrelenting efforts that go to certainly within range. To all of them, I say hats off. I'm proud of all of all of you and as you all contributed to elevating an otherwise memorable seventieth anniversary to an outstanding year on many fronts. Thank you. We're now ready for your questions. Thank you. If you would like One moment for the first question. Once again, via the phone lines, you may press 14 to register a question or comment. The first question comes from Deane, a Private Investor. Please go ahead, sir. Hey. Thanks for taking my question. It's pretty simple. Just looking just looking for a little bit of an update on any additional working capital required to execute the backlog over the next twelve months, or is kind of where we're at here from a working capital standpoint what we should expect going forward? That's a good question. Dejan, why don't you take it? Yes. The amount as you can see, the amount that we increased since the last quarter. So this increase reflect the fact that we have an higher backlog. So we anticipate, again, a small increase in term of the monthly that will be offset by, additional accounts payable. Of course, the the shipment in q four will be good, so we also forecast an increase in our account receivable. I hope this can answer your question. Yep. Yep. That's good. Thank you. Other point I would add is that we did a refinancing that closed last summer, and it was written up in our q q two results that gave us extra capacity. We did it with both GMO and BMC so as to have the extra borrowing capacity planned. Okay. That's great. The only other question I excuse me, is you had mentioned sort of the last bit of the v 20 plan, the focus on, you know, kind of the leaner leaner operation, a a quicker and more dynamic manufacturing. Are are you expecting any significant restructuring charges related to that, or are we kind of seeing most of the restructuring charges? Most restructuring charges have been incurred already, and now we're we're staffed to handle the backlog that grew last year. So there there might be, you know, minor minor tweaks to what I just said, but overall, the work is behind us in terms of restructuring charges. Okay. Thank you. And congratulations to the team for the sale of the Montreal plant and executing the V-twenty plant in what's been a pretty chaotic year. So congrats to you guys. That's that's an understatement, and I really appreciate your comment. Yeah. Thank you. As a reminder, one four to register a question or comment. Hello? Yep. We we show no further questions at this time. Okay. Then I the the the one last thing I wanna say is that the company is evolving, and we were blessed to have hired a new leader of the global operations and supply chain, Paul Poirey, who started in the second week of the fourth quarter. So we're well equipped going into the fourth quarter and anticipating a very busy fiscal twenty twenty two. I look forward to our report in May for the Q1 Q4 results of fiscal twenty twenty one. Meanwhile, I want to thank you for your attention this morning. This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you, and have a good day.