Earnings Call: Q1 2021

Jul 10, 2020

Earnings release

Greetings, and welcome to the Vilan Inc. Q1 First Financial Results Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. As a reminder, this conference is being recorded Friday, 07/10/2020. I would now like to turn the conference over to Yves LeDuc, CEO. Please go ahead. Welcome to our first quarter fiscal year twenty twenty one conference call. I'm joined today by Regent Hertigui, our new CFO, but it will be John Ball who will stand by to answer questions as he's presiding over his last quarterly results conference call, and he is now the exiting CFO. And I wanna congratulate him for the great years spent with the company since 02/2005. I think we announced the change to on the fifteenth anniversary of his tenure with us. We're very, very grateful that he's continuing as he as executive vice president, global finance, that will be able to benefit from his great capabilities. And Jean Jean has already earned his spot very well. He's been with us since last summer and has achieved a lot already, and I welcomed him on the team more than once. Wanna congratulate him as well. Think we're gonna make a great team, a great trio, the three of us. So, good luck to both, and, let's start this conference. I'll 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. But first off, let me start with two significant items. Earlier this week, we have agreed to the sale, which will be effective on 10/31/2020 of our MacArthur plants in Montreal, the plant known as Plant 27 within the land. The closing of the plant was planned as part of the v '20 reconfiguration of our North American manufacturing footprint, which I talked about many times in the past. Since we're ahead of time, basically, closing operations and getting the plant ready for sale five to six months earlier than the original plant, we're gonna be able to get, the benefits of the sale, this year rather what was originally planned to be next fiscal year. So the gross proceeds will be 12,600,000.0 US and are conditional upon the submission of a clean bill 72 environmental report to the Quebec authorities. I'm also proud to announce that's significant milestone that we've recently secured new financing in the form of 22,500,000.0 mortgage loan as well as a 65,000,000 revolving credit facility. The new financing will replace our old financing structure, will be used to support our operations, complete our restructuring and transformation plan, provide the necessary capital to pursue future growth initiatives, but equally important, strengthening also our balance sheet as the world economy enters a period of great uncertainty. One of the benefits of v twenty is that we started discussing the new borrowing facility, last summer, because we knew we would need it, as we were investing in v twenty. First off, as I told you before, we're gonna end up spending less to make v twenty happen, so that's good news. And it's a good thing that we started the negotiations and the discussions with our banks much earlier, and we were ready and basically in the last phase of the closing efforts when the crisis hit back in March. So a good a good outcome, and I'm very, very happy with this very important milestone that brings increased resiliency to our balance sheet. Speaking of uncertainty, the COVID nineteen pandemic definitely had negative impact on our results, but we're able to due to the fact that most governments recognize our company as a critical supplier of the central industry, to be spared of the harshest consequences of the global recession that struck early in the quarter. In fact, it struck at the end of the 2020, if you remember. We responded extremely swiftly in protecting our employees and ensuring the continuity of our global supply chain while delivering much improved results. And I will provide more details on this matter further along during the call, but let's have a closer look at our results. Net loss amounted to 1,900,000.0 or 9¢ per share compared to 5,800,000.0 loss last year or 27¢ per share. The decrease in the net loss or the improvement is primarily attributable to our improved gross profit as well as lower administration costs, which was partially offset by an increase in restructuring and transformation costs combined with an unfavorable movement in income taxes. Operating profit before restructuring and transformation costs amounted to 700,000.0 compared to an operating loss before restructuring and transformation costs of 6,800,000.0 last year. Adjusted EBITDA amounted to 3,800,000.0 or 18¢ per share compared to a negative 3,800,000.0 or negative 18¢ per share last year. The improvement in operating profit before restructuring and transformation costs and adjusted EBITDA is primarily attributable to a stronger gross profit driven by a range of e 20 initiatives and a better product mix as well as lowered administration costs. Our gross profit percentage increased from 19.2 to 24% for the quarter. The increase in the gross profit percentage is mainly attributable to a favorable product mix as well as the labor and overhead savings stemming from our restructuring and transformation initiatives, which started in the prior year. The increase is also attributable to our qualification for 1,900,000.0 of wage subsidies. The subsidies were put in place by government authorities to prevent further job loss in the context of the COVID nineteen pandemic by offering wages relief to companies negatively impacted by the market distress caused by the virus. And that's one of the reasons we were able to preserve our workforce and our talent as we're aiming on rebound rebounding as strong as possible once the crisis is behind us. So that was well welcome as we avoided layoffs that might have been forced by the current situation. This increase was partially offset I mean, the increase in gross margin. The increase was partially offset by a lower gross profit percentage in our French operations due to lower shipments of large project orders for the quarter. Let's talk about sales, order bookings, backlog. Sales amounted to 76,700,000.0, a decrease of 7,100,000.0 or 8.5% from the prior year. Sales were negatively impacted by a decrease decrease in shipments from our North American and French operations, which was partially offset by increase in shipments from our Italian operations. The decreased sales volume for the quarter is attributable to a lower shippable backlog in our North American operations combined with the negative impact that the COVID nineteen pandemic had on the global economy. For example, 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. Finally, as I mentioned before, we were able during the quarter to obtain recognition by most governments of our status as supplier of critical equipment to essential industries. And as a result, we were able to maintain our operations while managing through the pandemic. However however, we did nevertheless face government mandated temporary shutdowns in reaction to the spread of the virus in certain regions of the world, in particular, in India, and for a shorter period of time in Italy. Our Italian operations, though faced with these challenges, were able to deliver a strong quarter in terms of large project order shipments. Bookings increased by 12,500,000 or 19.5 for the quarter. This increase is due primarily to large project orders booked by North American, German, French, and Italian operations, notably in the liquefied natural gas and nuclear markets. This increase was partially offset by a decrease in nonproject orders booked by North American operations due to the unfavorable market conditions caused by the COVID nineteen pandemic. I'll say a few words about that when I talk about the outlook. We were encouraged nonetheless to record a 19.5% increase in bookings in the current context when compared to last year. We ended the period with a backlog of four and ten point three million, an increase of 3,500,000 or point 9% since the beginning of the current fiscal year. Our book to bill ratio for the quarter being an even one point zero zero. The increase in backlog is primarily attributable to the strengthening of the euro spot rate against the US dollar over the course of the current quarter. Financial position, summarize all of this. The new financing and the improved results for the quarter reiterate the fact that we have a strong balance sheet. Net cash settled at 44,600,000.0 at the end of the quarter. That's an increase of 13,600,000.0 or 43.9% since the beginning of the quarter. The increase for the quarter is first and foremost attributable to strong noncash working capital movements. The net cash per share was $2.07 US or $2.85 Canadian. Our equity at the end of the quarter settled at 283,900,000.0 or $13.15 US per share. In Canadian dollars, our equity per share was $18 for 13 at 05/31/2020 compared to our TSX share price at the close of business on that day, which was $5 Canadian and 2¢ in indicating once again that our share price continues to be undervalued. So that's the end of the financial portion of today's summary. I'm gonna go now into the outlook, and I'll start by mentioning once again that we're celebrating our seventieth anniversary this year. If some of you had the opportunity yesterday to attend our virtual annual general meeting, that was a first. I thought it was went fairly smoothly except for that interruption in the five second interruption. Think, yeah, we didn't get questions, so I hope maybe that that we might get feedback today. Though I did mention the seventieth anniversary and talked about the great history of the company and what my predecessors had accomplished, but I would encourage you to read that Valve World magazine article that made the cover of the the industry's leading magazine. Tom and my myself are quoted, but we also talk about many of our leaders and the dynamic transformation that's going on. So the other thing I mentioned yesterday is that we're strengthening our balance sheet. As I said, it's not only about the new credit facility, but the the combination of our cash action plan and the v 20 initiative, the improvement in margins, etcetera. Maybe say a few words about the COVID situation. As I say to our employees, with whom I communicate every week through a weekly video that I'm about to record in the next hour, We're not out of the woods yet. The Indian government has locked down last week the entire Chennai area. The outbreak continues strong in India. Now the third highest country in terms of reported cases, and we have a supply chain to manage over there. But our supply chain team is doing really good work in finding alternative sources. And as I said, we're company is doing a great job mitigating the impact of the the crisis on the overall global supply chain that we're managing. We're very proud of the team's overall response of all of our operations so far. The reaction to the crisis, including support from external stakeholders like the new bank syndicate and so on, was exceptionally fast. And as a result, the company is showing remarkable resilience in the circumstances. In terms of our q one preliminary results, I wanna mention that not affecting our q one preliminary results, but we made a decision just a few weeks ago that's gonna have an impact for the rest of the year of cutting our salaries of all employees in North America, starting from the top with board members, myself taking a significant salary reduction, and then accordingly down to the levels in the company. Everybody's contributing, the reaction of our employees is that they understand that we're in the depth of a recession. We don't know where we're gonna be in the fall. You're seeing the virus surge again in many areas of the world. So we have the prudence, and I would say the maturity as an organization to do whatever it takes to reinforce our base, and that's what's happening right now. Company's doing great, though, in terms of managing cash. I think in the context, as you see, our cash action plan and all the other actions I mentioned are gonna help us build strength as we go through a very, very difficult and unpredictable period. I wanna say about a few words about d 20. Those of you who attended the the presentation yesterday have seen me mention our progress against the five key levers of b 20, namely increasing the focus on our customers through the SBU, the new strategic business units that we created. Each of them have, delivered very interesting improvements last year. We're seeing our bookings go up in severe service and project, for example. Nuclear is still a dominant player in valve industry. Secondly, we're reorganizing our manufacturing footprint. We're ahead of time on this with the eventual closure and sale of Plant 27 ahead of time. We're, reorganizing our North American production model, making it leaner and faster with a reduced dependency on in house machining and leveraging an existing base of suppliers with whom we're contracting premachining work, and that's also going on, on track. We're transferring all the very low cost small forged valves to India. That's also following the schedule. By doing that, we'll be able to, quote, unquote, stop the bleeding on manufacturing valves that basically sell, you know, in a in the low 100 or even lower than that. And in India, we have a state of the art facility, and they're already producing some of those valves, and we're gonna end the transfer at the end of the year. And finally, the modernization of our systems and processes, that's the fifth lever with notable progress made, for example, an on time delivery with a new BPM, system. We have configured price quoting. CPQ is, being used and allows for much quoting, faster quoting. We're that we're increasing the visibility of our cost tracking and basically modernizing our systems, and there's a very strong overall team in everything we're doing. Everything about v 20, I keep repeating revolves around improving the end user experience. So overall, progress is being made on v 20, and I would say that the COVID crisis, although it did slow down some aspects of the work when we were operating under status of a central industry. We could not greet the constructor company in making changes inside the plants. And so but overall, COVID had a very mild impact on our team's ability to execute the plan, and talent is stepping up. And there are elements of culture change, building on teamwork and cross collaboration across the subs. Our margin awareness is going up, and I feel a lot of our leaders are stepping up. So that's that concludes the summary of where we stand on v 20. If I talk about business and operations, in many areas of our portfolio, the business remains generally dynamic, but with the most negative impact observed in the MRO and aftermarket, part of the business and also upstream where the center of gravity is Italy. We as I as I mentioned, we saw an increase in bookings quarter to quarter, this year, but we're dragged down by a decline in bookings in the MRO and spares market because our distributors, who are the main customers of the MRO and spares business, are stocking down. They're basically not stocking up. They're waiting for the crisis to pass, and they're willing to buy from master distributors at higher price to protect their cash. So that affects directly our booking. We hope that's temporary, but explains why we're seeing a decline in bookings in the last three, four months. That's largely driven by the MRO business. We're also expecting the upstream business with the lower oil oil price to be experiencing some difficulties this year. And as I said, we're we're in a recession, and, we're navigating through the fog as best as we can. And the good news is we have a resilient balanced portfolio because in the project side of the business and the severe service and the nuclear, we're seeing still very active bookings. And there, the impact of COVID really takes the shape of maybe affecting the continuity and fluidity of our supply chain where we're also taking lots of measures to offset those negative impacts. Few key things I wanna mention on the product side, that we're gonna step up product introductions, and we've got we've received recently good orders from the navy and the navy surge, the rebuild of the the shipyard. So navy is still a very strong customer for us, and they're relying on our capacity to handle new designs, and that translate into very interesting bookings recently. As mentioned earlier, we're in severe service. We're working on licensure approvals, and we've had, you know, recently two very important orders for severe service applications based on recently obtained licensure approval. Severe service, which is a growth area for us, is showing good signs of going in that direction. And finally, in operations, would say that despite the turbulence caused by COVID nineteen, we're seeing a true culture of continuous improvement building up across the board. So in conclusion, q one results were better than expected, especially if the crisis had started striking even before, q one started in March. The company is capturing the benefits of the v 20 plan, our modernized operations, the systems, and our much more focused approach to market and end user customers. And I would say in many ways, we're already deeply transformed, and there's a lot more coming on top of it. The combination of our actions, including our swift response to the COVID crisis, makes the company lighter, more agile, and resilient to great shocks. We continue to improve the work environment, learning how to run manufacturing operations in the midst of a pandemic. But we're not out of the woods yet. As I said, we've took every possible action to build up resiliency as we don't know what's around the corner and as we see the virus still spreading at a fast pace in many areas of the world. On the other hand, with a strong balance sheet and improving margins, we intend on capturing opportunities that will emerge from an industry that will inevitably be reshaped by the crisis. So there will be disruption ahead, but our employees have already proven a capacity to handle significant change. I thank them for their resolve and the sacrifice and the confidence they're showing, as I do, in the future. And on that note, I will, hand it over to our moderator and answer questions along with John Ball, if there would be any. Thanks for your attention. Thank you. If you would like to register a question, please press the one followed by the 4 on your telephone keypad. Once again, it is 14 to ask a question. Moment, please, for our first question. There appear to be no questions at this time. Okay. Wait another five seconds. Otherwise We have a question at this time. Okay. Yep. As we said we didn't, one came up. We have a question from Dean Trottier, which is a private investor. Please go ahead, mister Trottier. Hey. Thanks for taking my question. Congratulations on all the progress on the v 20 plan. My question relates to kinda the, yeah, no. The question relates to the the backlog I noticed. Over the years, you hover around 35% of the backlog being beyond the next twelve months from a delivery standpoint. Is there, as an outside investor looking at this business, is there an internal target that you guys have? Or what is is there a right amount of of backlog beyond a deliverable beyond the next twelve months? So the the answer follows the the line having a, as I said, a very diverse and balanced business portfolio. So in each of these strategic businesses have different cycles. So if you look at the nuclear backlog, typically, orders get shipped far beyond one year. So it could be even eighteen months. It will depend on the nature of the the project or the customer, and nuclear business requires a lot of what we call the inspection points through the whole process. You you you do a machining operation, and you stop. You wait for the inspector to come in and approve for the next step and so on. So you'll have natural naturally very much longer cycles, from order to delivery in the nuclear business, is which a strong part of our overall portfolio. On the other extreme, you see MRO and spares. And, typically, there, you can, if if we have the parts already at our distribution center in Texas, can literally be shipped in a few days, whereas, we operate on a cycle of about twenty six weeks for parts that are not available at our distribution center and are gonna be shipped directly from our plant. So this is kinda you know, it goes from ten days to half a year, cycles for the MRO business. And then when you look at the other parts of our business, whether it's severe service, the more severe the application, typically, the longer the cycle. In the power world, you're looking at thirty five to forty weeks, sometimes lower depending on whether you have stock in place. So that's my long answer to your question. So what you see is when when you say 35% of our backlog goes beyond one year, it's because a large part of our business is in difficult applications or highly technical applications like nuclear and severe service where you have longer cycles, or you're in the replacement valve valve business where you have much shorter cycles. And so over time, if you're worried and say maybe we should reduce the delivery time for a cycle, that's gonna happen nominally over time as we maybe address different sectors or that we gradually make, progress in reducing our cycle time through VPN, for example, the land project management. But what you see today, that that the profile of that backlog is very much a reflection of our diverse business portfolio. I hope I answered your question. Yeah. That was that was, yeah, quite thorough. Thank you. I just have one more very quick question. If you could give a brief update on where are all the the plans up and running, and how, like, how close would you say you are to a 100% or maybe benchmarking it before COVID hit to to see kind of where you're at. Capacity the the current capacity utilization of our overall global so in so it depends what you wanna compare us to. So if we're operating on three shifts a day, which we're not today, then you have a lot of available capacity. If you operate on one shift a day, then it you're probably close to, you know, the using the the normal capacity you'd be using. So my point is that we've reduced our capacity globally where we see bookings go down. We adjust it. And but we have a lot of room to wiggle in if we see our bookings go up without having to invest in additional manufacturing capacity. And we think that the d 20 plan was the right thing to do. We reduced our North American capacity where we clearly had excess capacity and cost, and we're leveraging our Indian facility, which was ready to handle a lot more volume. So we're in a process we're we're in a business where it's really all about adding direct labor in additional shifts to capture the extra capacity. I would say that we have, in terms of footprint right now, a normal capacity that is underutilized because of the current context. Not very much underutilized if you say one shift, for example, per day, but we have potential to grow quite fast without having to invest in new facilities. Okay. That that answered my question. Thank you very much. Good. Thank you. Any other questions? Yes. Our next question comes from the line of Robert Butel, Oak West Corporation. You may proceed with your question. Thank you. Good morning, and my compliments on your progress on V twenty. Notwithstanding the general environment, I'm pleased to see the speed at which you're moving. Question, revolves around in the short term, it's really about the asbestos effects. I was wondering, we didn't talk about it in this quarter, but I was wondering whether lower asbestos expenses in the quarter are reflected in your lower SG and A. And then going forward, if you could give us any insight or color into, what your expectations are for this, very long tail problem. So let me take the second part of the question, and and I'll hand over the first part of your question to John Ball. Okay? Perfect. So on the second part of the question, unfortunately, it's one of our costs in doing business. We're not seeing asbestos signs of the the asbestos litigation go down. It's fair it's been fairly stable over the last three, four years, and you have spikes here and there. But we're we're dealing we're dealing with it, so don't expect that to go down. That's all I'll say at this stage, and it's something we're managing very tightly. John? Yes. And you'll see more information on the MD and A, which we filed on SEDAR. There's a section on contingencies. We talk about both the dollars and the number of cases and the location of those cases in The United States. So this is all a purely American issue. We don't have the process of asbestos anywhere else but The United States. It's a significant amount per year. Quarter on quarter, Q1 on Q1, it's pretty much flat. By coincidence, it was $2,046,000 versus $2,028,000 last year. The number of outstanding claims is pretty much flat. We had fifteen eighty three claims outstanding at the end of Q1 versus fifteen sixty one. It dates back to the 1970s and principally in respect of work valves that we supplied to the U. S. Navy. The U. S. Navy specified asbestos packing to protect against fires on ships. And at that time, I don't think people were fully aware of all the risks of asbestos. So it was a U. S. Navy requirement. The people who supplied the asbestos have all been sued into bankruptcy years and years ago. So they're coming after companies like the land that supplied the valves that had the asbestos backing on there. You would think this problem would decrease over time. However, the lawyers out there seem to find new and in generous arguments for continuing to sue. So there's the concept of secondary exposures. So even if many of the people who worked on these shipyards back in the 1970s have passed on, the next generations, kids and grandkids who might have down on their grandfather's knee after he came home from work, they're continuing to sue for us. We have not actually gone to court and settled. We haven't had judgments rendered against us. It's a little bit like an extortion where you try to place your arguments and then you negotiate the best possible settlement given the cost of going all the way to court with additional legal fees and the possibility of a judgment that goes against it. So so in general, there is no wrong John, just to to summarize, as I said, it's a it's a it's a fairly stable cost that we're learning to live with. But in answer to your first question, sir, the the reduction in administrative cost is not the result of a reduction in asbestos. It's it's the consequence of actions we took and also focus on SG and A. As I said earlier, the wage subsidy has helped in the first quarter as well, mile down the impact on overall structural costs. Well, in a certain sense I'm pleased by that answer because it wasn't a one time or short term effect. Nevertheless, this issue of course stands and it remains. I was just wondering if given all the things that have been shut down, whether lawyers and all this stuff, mechanics of filing were delayed because people couldn't go see their counsel. But it sounds like whatever it is, the pipeline is full and it will continue to be full for a while. That's interesting. I'll leave it. Thank you again. All the best as you continue to make the progress. And of course, disposing of the real estate in this market also sounds like a good thing because if you didn't need it, you didn't need it. So good luck. Okay. Thank you very much. Thank you. Any other questions? There are no questions at this time, sir. Okay. So thank you everybody for your attention, and have a good summer, a restful one. And as I tell every one of my employees of our employees, stay healthy, and take care of your friends and family as best best you can as we go through a very difficult and uncertain period. Thank you very much. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.