Earnings Call: Q4 2020

May 21, 2020

Earnings release

As a reminder, this conference is being recorded, Thursday, 05/21/2020. I would now like to turn the conference over to Yves Le Dzouk, CEO. Please go ahead, sir. So it's been quite a year. Welcome, everybody. Fiscal year twenty twenty began with one of the most significant announcements in the company's history, a transformation plan that now every employee knows of V20 that aims to make the company more agile and laser focused on serving our customers. And as the deployment efforts of the V20 plan grew in momentum over the year, the company was able to deliver improved adjusted results recovering from a bad first quarter. And then just when the blue skies were looming, the global economy was shattered by COVID-nineteen. So before I dive into the year's summary, let me start off with what would normally be my conclusion. Thanks to the great progress in transforming the company and to the many actions taken across our global operations, the land is far better equipped today and more resilient to navigate through the storm and to rebound when the economy the economy recovers. Furthermore, our new president, Bruno Cabronero, with us since November, has brought an enormous, wealth of industrial experience. And his outstanding talents. And along with other very capable new hires, they're increasing our leadership capacity at a very important juncture in our history. So let me start with the sales order bookings and backlog. Story here is that we recovered from very disappointing first quarter results. Sales increased for the year. But before I actually go into the year, I'm going to be because of the fourth quarter results, I'll be giving you a global summary of the year. But since it is also about the quarter end, let me just summarize some of the highlights of the quarter that you also have in the press release that saying that sales for the quarter were 113,600,000.0 That was for a net loss of $11,100,000 for the quarter, of course. Operating profits before restructuring and transformation costs under the V-twenty plan were $6,200,000 for the quarter. We had an adjusted EBITDA of $9,900,000 for the quarter. Net new orders received during the quarter were $88,300,000 And everything else, I'll be covering through my year whole year summary. So again, back to the whole year summary. Sales increased by $4,700,000 or 1.3% from the prior year, thanks to an increase in shipments from the company's Italian operations that resulted from a record backlog in the upstream oil and gas industry. The Italian performance was partially offset by decreased shipments from the company's North American and French operations. Bookings decreased $32,000,000 or 8.6% from the prior year. That is largely due to the fact that both our Italian and French subsidiaries had recorded significant project orders at the end of the previous year. Also in North America, our MRO business, experiencing last year a more normalized stocking replenishment cycle, could not repeat the unusually high surge of non project valve restocking orders that was experienced back in fiscal twenty nineteen, the previous year. We ended the period with a backlog of $406,800,000 a decrease of $42,900,000 or 9.5%, resulting from a book to bill ratio of 0.92. However, those numbers, while not satisfactory, are not fully reflecting the business performance of fiscal year twenty twenty as they were dragged down by low booking and margin performance in the first quarter that we gradually recovered from in the following three quarters. Let's talk about the performance. We've experienced a net loss, while the operating profit and EBITDA show improvements when adjusted for restructuring and transformation costs. Net loss amounted to $16,400,000 or $0.75 per share compared to $4,900,000 or $0.23 per share last year. Net loss for the year was significantly impacted by a onetime $8,200,000 noncash tax adjustment to derecognize unused tax losses as well as a nonrecurring amount of $9,600,000 as part of the company's restructuring and transformative V-twenty plan. With regards to the noncash tax adjustment of $8,200,000 this is a derecognition under IFRS standards. We will be able to re recognize it in the future. If it's required, we will not lose the ability to use it in the future. Back now to the restructuring costs. These costs include cash severances, temporary project resources and the travel and lodging costs as well as the moving costs related to dismantling and transportation of machinery and equipment required to optimize our manufacturing footprint. Again, that amounted to $9,600,000 as nonrecurring restructuring costs for V-twenty. The company recorded this $8,200,000 deferred tax expense related to the de recognition, as I said. And if we exclude both the 8,200,000.0 and the $9,600,000 for the de recognition of the tax deferred tax and the 9,200,000.0 as part of our nonrecurring restructuring and transformative cost, the company's net loss would have been $1,200,000 compared to $4,900,000 last year, representing an improvement of 3,700,000.0 Meanwhile, operating profit before restructuring and transformation costs amounted to $2,900,000 compared to a comparable operating loss of $7,000,000 last year. Adjusted EBITDA amounted to 16,100,000.0 or $0.75 per share compared to $7,100,000 or $0.33 per share last year. These improvements in our performance adjusted for nonrecurring transformation costs are primarily attributable to successfully decreasing our administration costs and an increase in gross profit percentage. On this adjusted basis, the company was able to make an operating profit for the first time since fiscal twenty seventeen, while our adjusted EBITDA of $16,100,000 more than doubled compared to last year. What drove gross profit to increase by $2,500,000 or from a percentage point of view, 23.3% to 23.7%, 40 basis points. Let us remember that gross profit landed on nineteen point two percent at the end of the first quarter, so the recovery in gross margin in the following three quarters averaging 25% was significant. This came from a combination of several factors, reflecting first, the exceptional shipment performance of our European operations second, a very poor first quarter performance by our North American operations was partially offset by a gradual increase in margins through the last three quarters, thanks to reduction of our production overhead in accordance with the B-twenty plan to a better mix and to our business units' increased focus on higher quality orders. So that's it for summary of our results. Now what I want to do is talk more specifically the transformation plan V20. We're ahead of the plan in terms of schedule despite the early challenges of ramping up experienced earlier last year. In the last twenty years, Valand has continued to live up to its superb brand reputation as leader in valve technology and product quality, while our business competitiveness, mainly with respect to our North American operations, lost a lot of ground to an increasingly competitive industry. So we had no choice. Our business model had to be changed in order to better leverage our assets and strengths. And the business case that led the Board of Directors to unanimously approve the strategy announced in January 2019 consisted in significant recurring bottom line improvements achieved by fiscal year twenty twenty two, that's next year, justifying one off investment in restructuring costs to carry out the transformation. A year later, where do we stand? There's much good news. First, thanks to the resourcefulness of our project teams and to growing North American project bookings, we will require less than half of the one off V-twenty investment, while realizing higher recurring bottom line benefits. Second, although the greater portion of the V-twenty return on investment was to be realized in fiscal twenty twenty two and beyond, the company is already capturing the benefits of its modernized systems and new approach to markets, and in many ways, is already deeply transformed. So what I want to do now is remind you of the five key pillars that define V20 and give you a progress update against each of the five. First pillar was drive growth, thanks to greater customer intimacy through five integrated and focused businesses, two of which already existed, the French and Italian operations, and the three others basically reentering their North American operations. So that's one. Lever two, reorganize to consolidate four North American manufacturing plants into three, creating more specialized manufacturing centers. Lever three, drive substantial savings in cost and cycle time by shifting our North American manufacturing operations towards a leaner, less vertically integrated model centered on production cells lever four, to our state of the art low cost Indian facility, transfer all non nuclear and non Navy small forged valves as well as pressure fuel valves normally destined to our MRO business and the fifth lever, not the least, is to continue to invest in systems and processes to improve customer service through, for example, best of class project management, modernized cost monitoring and configuration pricing. So there's been progress against each of these five pillars. And when you summarize the progress, first of all, with respect to the five strategic businesses, they can each boast remarkable achievements, thanks to their business focus and the coherent market activities. I already mentioned our Italian operations delivered record sales last year, and our French operations still by far our most successful business. Meanwhile, in their first year, the newly created North American project manufacturing business units contributed to the company's much improved performance in the second half of the year, registering excellent bookings in the petrochemical, mining and power sectors while earning the trust once again of the American defense industry with substantial orders in connection to its current shipbuilding activities. In the fall, after several months of negotiations, an agreement between the company and our unions was successfully reached on how to proceed with a shift towards a new lean production cell model. Following this milestone agreement, projects were accelerated and production in our large Montreal Plant Two Point Seven will be stopped five months ahead of the original plan. Production transfers to India, they will also be completed as planned this fiscal year. This move, combined with the reduction of production overhead in North America, will greatly improve the economics of our global MRO and aftermarket business unit. And with respect to systems improvement, we're changing the way we do business, and we made substantial progress in modernizing our systems and processes. That's an effort that was initiated a few years back. Let me cite just one example. We've made our project management capabilities a distinctive competitive asset, and the results measured in terms of on time delivery are impressive. And believe me, they are noticed by our customers. We've had many other notable achievements outside V20 progress, and I'll just mention three in the areas of market development and product innovation. As I mentioned earlier, the company's underperformance in recent years was largely driven by North American operations. Through this period, the economic performance of our international subs has remained steady. Our Italian operations at Vilan ABV are a great example of this dynamism as we recently signed a joint venture agreement with a Saudi partner, a key milestone in our Middle East strategy, the largest valve market in the world. Our French operations, renowned for their leadership in the nuclear market, have been able to diversify their innovation capabilities into several non nuclear initiatives over the years. The latest successful ventures securing new orders of cryogenic valves for the Indian aerospace industry, a very promising field. And I would say that you don't want to tell our French team that their business is only nuclear. They'll be quick to prove you wrong. Finally, the market will soon see many new product introductions from Boeing. Since I want to keep this confidential, the only thing I'll tell you is that they are aimed to be groundbreaking or market opening for us. And I'll just say today, stay tuned for a few very important major product news to come in the course of the year. COVID-nineteen, both a dark shadow and an opportunity to stand out. What do I mean? Although this year's message to shareholders has a positive edge to it because of our progress with V20 and the improvement in our operating results, the dangers of the terrible economic crisis that has assailed the world are certainly not lost on the board and my management team. As supplier of critical equipment to essential industries where we were spared the most immediate immediate and devastating consequences of the crisis, and I'm very proud about how our multinational organization has responded in very admirable fashion in enabling remote work in a matter of days, protecting those employees showing up every day at the shop and ensuring the continuity of our global supply chain. But no one can foretell how deep and long the global recession will go. In such a volatile environment, we should first be thankful for the progress made in fiscal year twenty twenty in driving process improvements, eliminating significant structural costs and bringing about a new market focus. The combination of all this has made the company lighter and more agile and much more resilient to GreatShox. Second, we will continue improving the work environment, making it safe and secure as safe and secure as possible for employees. Like many other companies, we're writing a book right now on how to manage a manufacturing company through a pandemic. And we've had a couple of months head start over many, many other industries because, as I said, we were essential supplier to essential industries. But we're still learning, and I think we're doing a really good job. The well-being of our employees and their family will remain our most important concern. Third, the crisis will inevitably reshape our industries. How do we plan through the fog? By remembering our Aison d'Art hotel employees every week at a weekly video that started two months ago, I'm going to record my tenth tomorrow. I talk about remembering what we're about. We're a manufacturing and technology company with a remarkable track record of standing for our customers with reputed products and services that keep those essential infrastructure industries cornerstones to the world economies safely running. Our customers' needs will evolve rapidly. If we pay attention and listen to them every single day, we'll find innovative ways to serve them, to reassure them. There is disruption ahead and maybe possibly upheaval, but our employees have already proven their capacity and resilience in handling enormous change in turbulence. The resolve bolsters our confidence in an uncertain future. And in many ways, the crisis is bringing our employees from across the world closer. And I can tell you that I believe collaboration among employees, various departments from subs from across the world has never been stronger. So on behalf of our Board and the Valant family, I thank our employees and add, let's keep going. On this, I'll hand it over to our moderator, and John and I are here to answer your questions. Thank You will hear a three tone prompt to acknowledge your request. If your line if your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. Once again, to register an audio question, please press the one followed by the four on your telephone keypad. Our first question comes from the line of Jean LaRotte with By the way, I will translate my answer in a minute for those of you on the line who can't understand French. Just to summarize, the question was largely about what's happening with the manufacturing facilities. So as I said, we are reducing our number of plants in North America from four to three. The production from Plant 2.7, which will be closed once we're finished production in the next couple of months, is going to be transferred either to Granby, either to the other Montreal plants or either to Williston in Vermont. And I explained the specialization principles, that is we have quarter turn valves, multi turn valves. Quarter turn valves will be in the Montreal facility coming out of the '27 and multi turn valves will largely be in Grandy, but we keep Williston as a center of excellence for Navy and nuclear and also other multi turn valves kind of a complement complimentary capacity to Grandy. And we're ahead of plan. And once the, Plan 27 is closed, will proceed to sell the property. Are there any other questions or comments? There are no questions at this time. I will turn the call back to you, sir. So maybe the the person with whom I was just talking had another question for me. So maybe we allow him to ask him that last question. Thank you. Okay. So what I'll do is I'll, to the best of my memory, translate the exchange I've just had. It has to do with our dividend policy. So our decision is not to cancel our dividend policy, but to suspend it on a basis that will be reevaluated every quarter. And we're doing like most companies are doing right now in the face of a very uncertain volatile, economic environment. We're not taking any chances, and we're just protecting our cash. And so this is what the family and the Board has decided to pay a dividend at this stage. Other questions had to do with the performance of our plants. Why did we choose to shut down Plant 2.7? It had nothing to do with the actual performance of one plant over another. But as explained last year, it had to do with, first, the decision to reduce our manufacturing capacity. And for all sorts of reasons that had nothing to do with the performance of one plant over another, we decided we would close Plant Two-seven and consolidate activities into the three others. That was basically the exchange I just had. Maybe another chance, any follow-up questions, and then we can maybe conclude. So I hand it over to the moderator and maybe leave it to additional follow-up questions from anybody else if there is an interest in Thank doing you. Our next question comes from the line of Deane Trotzin, Private Investor. I was hoping to just get a little more color on the V20 plan and, I guess, how you managed to get quite quite a bit ahead of schedule with it. If you could if you have anything you can give me to help me understand a little bit more, that would be great. Thank you. So you're saying you're asking why we're ahead of schedule? Or Yeah. What does it what does it mean that you're ahead of schedule? I guess if you could give me a little more color on why you're ahead of schedule, what kind of has happened right? I guess, unanticipated has gone correctly to get you So ahead of I think we're ahead of schedule largely because and I wanna state that. And, a lot of great talent stepped up. And, as I said, not only are we ahead of schedule, but we reduced the original estimated spend quite dramatically. And that's because we had folks who stepped up and basically spared the company from hiring consultants or construction support. So we save money there. We have a lot of knowledge internally. And when you combine combine, you know, the decision of how to sequence the very complex task of moving out machines from one plant to another, reconfiguring plant and so on with a very deep valve knowledge that we have, we're there we're able to gain a lot of time. And so the construction work in the plant moving on very, very fast. The management of our backlog, and and reassigning it as we go was was helped by the implementation of capacity planning systems that we didn't have before. So it's like everything was converging, and, people feel the urgency of turning the North American operations back to profitability. And that urgency is basically defined a sense of purpose that I think is defining our company very well. In terms of where we are right now, at the end of the year, we will have one plant fewer earlier than originally estimated, which means a lot less structural cost to deal with. We're going to have transferred everything we needed to transfer to India, those valves that we lose our shirt with, those are the commodity valves that and India was ready to get them. So that's going to help us increase our margin on commodity valves. We've made tremendous progress on systems deployment. If you've been following the analyst call for the past four years, you've heard me talk about the need to bring back our delivery performance to acceptable levels in the industry because we had a reputation for late deliveries. And right now, since we deployed the new system a year ago, our results are stellar. It's fantastic. And I really believe we have a distinctive competitive asset that makes us unique in the market. It's been actually two years of drawing up the project management process and and deploying the system. And so basically, the whole project management now is automated, and we're able to track every line of every order we get, assigned to any given plant and know what's going on and be very proactive about corrective measures when there are curveballs thrown at us and they're always in project management. So you bring it all together. And as I said, we're already deeply transformed even though the work is not finished yet. There's still a lot of work to be done. Deployment of production cells in the Quebec plant, for example, that's going to happen in the second part of the year, but it's going to happen with far less structural cost to support. And last but not least, the creation of our strategic business units about a year and a quarter ago, We're off to like everything, it's a new start. And at the end of the year, we were able to record tremendous orders in the mining business where we hadn't had orders in years, petrochemical, chemical, the power business where we've seen a slowdown in previous years. And that has a lot to do with the focus, the focus of creating cross functional teams that define market strategies and go after end user customers. So it's all adding up. And it's basically what you're seeing is a reinvented demand that's emerging. I hope that answers your question. Yes. That does. Thank you very much. Any other questions? There are no questions at this time, sir. Okay. So on this note, I'll say thank you for listening, and we look forward to the next quarterly call in July. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.