Earnings Call: Q2 2021

Oct 9, 2020

Earnings release

Greetings, and welcome to the Vellum Q2 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. CEO. Please go ahead. You, and welcome to our Q2 quarterly report call. Welcome to our conference call. I'm joined today by Richard Estigui, our CFO and John Zal, our Executive Vice President of Global Finance. There's a lot to talk about this morning, including the important changes in our Board of Directors, significant progress in our B-twenty implementation as well as a press release this morning reporting a very good example of our success in driving bookings up this year despite the headwinds of a global recession. To highlight the significance of yesterday's Board announcement, I will end this morning's report with comments on the change in our Board of Directors, but let's begin with our results. Net loss amounted to $5,100,000 or $0.24 per share compared to a net earnings of $1,400,000 or $06 per share last year. The increase in net loss for the quarter is primarily attributable to a lower gross profit, a $1,700,000 unfavorable movement in unrealized foreign exchange losses, primarily attributable to the weakening of the U. S. Dollar against the euro and the Canadian dollar over the course of the quarter, an increase in other expenses mainly due to land cleanup costs of the former factory as well as an increase in restructuring and transformation costs, all of which partially offset by the recording of $4,300,000 of wage subsidies for the quarter, which were allocated between cost of sales, administration expenses and restructuring and transformation costs. The subsidies were put in place by government authorities to prevent further job losses in the context of COVID-nineteen pandemic by offering wage relief to companies. This allowed us to maintain our employment levels required to being able to bounce back as soon as the recessionary effects of the pandemic disappear. Our gross profit percentage for the quarter decreased from 25.7% to 25%, a drop of only 0.7 points, which in the context of sales being 20% lower than last year's second quarter, reflects the improvement in our margins. The decrease in gross profit percentage for the quarter was partially offset by the recording of a $2,300,000 of wage subsidies. And on a year to date basis, the gross margin has actually notably increased versus the first six months of fiscal twenty twenty. I'll be explaining later in my address why our margins are improving, notwithstanding the wage subsidies, particularly in our North America project manufacturing business. With respect to bookings, backlog and sales, bookings increased by $24,600,000 or 32.1% compared to the first quarter of the current fiscal year and by $10,600,000 or 11.7% compared to the second quarter of the previous fiscal year. This increase is primarily attributable to higher orders recorded by French and North American operations, particularly in the nuclear and downstream oil and gas markets. Our book to bill ratio for the quarter and half year was one point four three and one point two three As a result of bookings outpacing billings, we ended the period with a backlog of $462,700,000 an increase of $55,900,000 or 13.7% since the beginning of the current fiscal year. Besides the strong book to bill ratio, the backlog was also positively impacted by the strengthening of the euro spot rate against the U. S. Dollar since the beginning of the fiscal year, increasing from 1.1 to $1.19 The backlog also increased for the period due to delays in shipments attributable to inefficiencies experienced in reconfiguring our Canadian plants under the V20 program as well as supply chain issues created by the COVID-nineteen pandemic. We had to manage many disruptions related to our supply chain, which caused significant delays on certain customer orders and due to travel restrictions, we experienced difficulties in getting inspection clearance to deliver certain large project orders. Sales amounted to $68,300,000 a decrease of $17,200,000 or 20.1% from the prior year. Other than the issues related to supply chain and production disruption mentioned earlier, the decrease in sales for the quarter was also caused by the reduction of non project orders delivered by North American operations due to the unfavorable market conditions triggered by the pandemic, which significantly affected our distribution channel. More on that later. Financial position now. Over the course of the quarter, we were able to secure new financing in our North American operations in the form of $17,300,000 secured mortgage loan and a $65,000,000 revolving credit facility and in our accounting operations in the form of $3,400,000 that is unsecured state bank loans. The new financing will be used to support our operations, which is particularly useful in these challenging times, complete our V-twenty plan and provide the necessary capital to pursue future growth initiatives while strengthening our balance sheet as the world economy faces a period of uncertainty. Net cash settled at $60,400,000 at the end of the quarter, an increase of $29,400,000 or 94.8 percent since the beginning of the fiscal year. The increase for the year is primarily attributable to strong favorable noncash working capital movements and $14,300,000 of long term debt additions, which were provided by the new financing. The net cash per share was USD 2.8 or CAD 3.65. Our equity at the end of the quarter settled at USD 2 and 88,500,000.0 or $13.37 per share. In Canadian dollars, our equity per share was 17.43 as at 08/31/2020, compared to our TSX share price at the close of business on that day of $5.57 indicating that our share price continues to be undervalued. And that, may I say, 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, I would say, hostile environment. As a reminder, here is how the land has reacted. First, I want to remind everybody that 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, well as in Portugal and Taiwan. So we saw the crisis loom probably earlier than most. There's no book on managing operations through a pandemic, but Valena is very quick in implementing sanitary measures, social distancing, health surveys, protocols in case of outbreaks. And so far, our record in maintaining a safe work environment as possible is something I'm very proud of. We're seeing how safeguards could be raised even further as we need to remain extremely vigilant, observing that most countries are experiencing a second wave of resurgence of COVID-nineteen. We're a supplier of critical equipment to essential 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 affected and continues to affect the production flow in many of our plants, particularly in North America. On the other hand, we did a very good job managing the impact of the pandemic, both from a risk mitigation point of view, making, for example, swift decisions, shifting supply sources, of course, managing our costs. In that regard, I'm very grateful to everyone in our company, namely our board members, leaders, and employees who accepted a salary cut in our North American operations. In addition, we reduced our administrative expenses, and more importantly, found ways to pursue the deployment of our V-twenty agenda with far reduced expenses and resources. Where the global recession has hit the hardest, as I reported in July, our MRO bookings are non project valves, heavily dependent on a healthy oil and gas sector. We continue to see distributors' behavior heavily slanted towards protecting cash and therefore, stocking down. We believe, of course, this trend could be temporary but can't predict when stocking orders from our distribution channel will surge back. This brings me to talking of the business achievements and progress made in our V20 transformation. The five priorities of our V20 transformation, if I remind our listeners, are: first of all, increasing the focus on our customers through the creation of strategic businesses out of our North American operations. That happened two years ago. Secondly, reorganizing our manufacturing footprint in North America, reducing our number of plants from four to three and making the remaining three more specialized manufacturing centers. Thirdly, a leaner and faster production model, reduced dependency on in house machining fourthly, transferring commodity products to lower cost sites like India and last but not least, modernizing our systems and processes. As I reported exactly a year ago, we were expecting the benefits of v 20 to start kicking in towards the end of fiscal twenty one. We're now halfway into fiscal twenty one and are witnessing a few key wins already. Let's start with bookings and our increasing backlog. By creating the strategic businesses, we were aiming to improve the effectiveness of our market strategies with consistent targeting distinct niches or applications where our superior products and technology capabilities stand out and then focus on meeting our end user stuff requirements. The success in our bookings this year is a perfect example of this strategy. For example, in severe service, we're seeing a surge of orders from targeting distinct license or approved applications. We're also here very much helped by our strong market presence in China and Southeast Asia in that regard, where the economy has not slowed as strongly as in the Western markets. Our French operations continue to record strong bookings, not only in nuclear but also in special niches where their capabilities stand out. And despite an incredibly adverse economic environment, namely the oil and gas industry, our Italian operations have successfully registered a string of orders totaling $30,000,000 in the FPSO sector. That's a floating production storage offloading. That's what FPSO means. And I refer you to the press release issued this morning to read more about it. We're facing very high uncertainty in the coming months, and we can't foresee whether the momentum in our market efforts despite the crisis will be maintained, but we're very happy to see our backlog climb by near 14% since the beginning of the year. With V20, we're also aiming to significantly improve the margins of our project manufacturing business in North America. This is exactly what's happening and one of the key factors contributing to our year to date gross margin of 24.4%, exceeding that of last year by 1.2 points. Why is that? I'll mention three key factors. First of all, an improved product mix helped in part by the growth in our higher margin severe service valve sales, reduction of structural production overhead costs with the closing of operations in one of two Montreal plants six months earlier than planned. In that regard, the acceleration of the closing of Plant 27 allows to conclude the sale of the property this year rather than in fiscal 'twenty two. Indeed, the sale of our Montreal plant on MacArthur Street was completed during the quarter and will be effective 10/31/2020. Gross proceeds will be $13,300,000 and all underlying conditions for the sale were satisfied. With this important milestone, we're significantly reducing structural costs in our North American operations, a benefit that is materializing this year, but will have a full year effect in fiscal twenty twenty two. As I said last year, to explain why we were seeing a reduction in project bookings at the time, which we anticipated to be a temporary situation, we have become a lot more selective in project bidding, and our sales and quotation team carefully apply a new pricing discipline, which is helping our margins as well. Of course, the transfer of commodity valves to India will also contribute to improved margin as we are nearing the completion of this important aspect of our plan. Last but not least, speaking with E20, the shift in our manufacturing model towards achieving leaner and more agile operations in North America is an ongoing initiative, and we're not there yet. This shift requiring new processes and adaptive capabilities along with COVID driven disruptions, the move of machinery, the accelerated closure of Plant 27 combined and causing the production delays that I referred to earlier. As a summary, I'm very thankful that we, a, started our V20 transformation a year before the pandemic erupted, and b, found ways this year to accelerate its deployment at lower costs. This, along with the increased backlog, provides the land with a lot more resilience and agility going into the last two quarters of fiscal twenty twenty one and then, of course, into fiscal twenty twenty two. To conclude on the business update, we're reporting very encouraging signs of improving the core fundamentals of our global business. But we're not out of the woods yet, fighting through an indefinite global economic crisis, remaining vigilant during the unrelenting pandemic, which still much to do to successfully adapt our North American operations to a new manufacturing model. Our employees, with whom Bruno Carboneiro, our President and I are constantly communicating, are energized and up to the challenge. In May, I said our aim was to get out of the storm stronger than before it hit the world economy. Let me just say that I like our odds. Now I'd like to say a few words about the changes announced yesterday in our Board of Directors. And if you allow me, I'll read from the press release that came out end of day yesterday. We're announcing that we're appointing James Manabak as the new Chairman of the Board. The outgoing Chairman of the Board, Tom Belling, will continue to serve as a Director of the company. Mr. Manabak joined the Board in 2018, and he's the first independent Chairman of the company. His experience in the valve and flow control industry is impressive. He's worked at Emerson Process Management, in Zomox, Fisher Control and Roper Technologies and iVai as well. Rob Vellem has been appointed Vice Chairman of the Board as the Vellem family continues to move from the second generation leadership to third generation and independent leadership. Rob has served on the board since 2013, and he is the Executive Vice President of MRO and Aftermarket and one of the company's strategic business units. And Rob reported to me until recently when Bruno joined us as President. He now reports to Bruno, our our president. Bill Sheffield has been appointed chair of the audit committee, a position he previously held, and then it was previously held by Jim Mannenbach. Bill Sheffield Sheffield was previous previously lead director, a position that is no longer required due to the appointment of an independent chairman. And he was chair of the Corporate Governance and Human Resources Committee, succeeded by Dara Gernofsky, who joined us back in 2019 as a board member. Tom Velli, who's been director since 1976 and chairman since 2015, will, in addition to being a director, serve as an adviser to the chairman, to myself and work on various matters at their request. At our request, Tom will also continue to be involved with some of the subsidiary companies. Why are those changes important? I'll get back to my own address. Let me give you my perspective. First of all, with Tom, Rob as our new Vice Chairman and Ivan Vellin, the family is still very present on the Board. With Jim the Chairman, the Board dynamics are changing and reflect where we're going as a company. Jim is very much a growth person, and his background and track record in the valves industry, but also in other industrial fields, tells the whole story. He'll be a value adviser in defining the post V20 strategic path, something Bruno and I are devoting a lot of attention to, and I very much look forward to working with Jim and supporting him in his important new role. As far as Tom is concerned, well, this is not the end of anything, but rather the beginning of a new period or anticipate being able to benefit even more from him his counseling as he's freed up from the demanding duties of the chairman role. As we turn our attention to planning our post pandemic growth, I expect Tom to continue and support me and my team with his deep knowledge of the industry and of our products. I never hesitated to pull in strategic product discussions, tough business issues, or in meeting new customers, and I told him he should expect more of that coming. All in all, I hope the market sees into the announcement something more significant than a rotation in roles within our board the same way I do. As we complete the 20 deployment in the course of the next few months and manage through a global recession, we're entering a new phase in our company's evolution, and I look forward to our Board of Directors' continued exceptional contribution in building our future. Thank you very much. Now Jean Jean and I are ready for your questions. Thank you. Telephone. One moment, please. Once again, via the phone lines, you may press the 14 to register a question or comment. And gentlemen, I show no questions at this time. I'll turn the call back over to you. Alright. Thank you very much for your attention. I look forward to the next quarter and to hearing your feedback. And until then, have a great long weekend if you're Canadian, and stay safe and healthy. Thanks for your attention. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.