Earnings Call: Q1 2020

Jul 12, 2019

Earnings release

Greetings and welcome to the Belen Inc. Q1 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, July 1239. I would now like to turn the conference over to Yves Lejuez, President and CEO. Please go ahead. Merci, thank you very much. Good morning, everybody. Welcome to our first quarter fiscal year twenty twenty conference call. I'm joined today by John Ball, our CFO. 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. First off, I will state that we're not satisfied with the results for the first quarter of our fiscal year. We've experienced delays in shipping higher margin products in our North American and French operations from which we expect to recover in the course of the year. The performance of our North American operations should also gradually improve as we replace last year's backlog with new orders reflecting greater rigor in project selection and pricing. I'll say a few words about this further along during the call. Let's have a closer look at our results. Net earnings or loss, net loss amounted to $5,800,000 or $0.27 per share compared to $3,700,000 or $0.17 per share last year, also a loss. The increase is net loss in net loss is primarily attributable to lower margins despite our higher sales volume. EBITDA amounted to the negative $4,300,000 or negative $0.20 per share compared to a negative $1,500,000 or negative $07 per share last year. The $2,800,000 decrease in EBITDA is primarily attributable to lower gross profit percentage caused by the shipment of larger lower margin orders combined with an unfavorable product mix, which is what I just referred to, namely the difficulty in shipping products out of our French operations. Our gross profit percentage decreased from 22.7% to 19.2%, that's three fifty basis points for the quarter. The decrease in the gross profit percentage is mainly attributable to a combination of temporary or non recurring factors as well as to more structural business related factors. Temporary or non recurring factors include a product mix with a lower proportion of higher margin product sales caused by delays in shipments, such as nuclear valves from our French operations, spare parts and highly engineered severe service valves in our North American operations, all of which are expected to pick up later this fiscal year. The more structural factors causing the decline in gross margin include the shipment of technically complex orders with lower margins entered prior to this fiscal year. Overall, we're still delivering the backlog built since the 2018, which carries a significantly reduced margins experienced in our North American project manufacturing business, a heavy trend observed and reported in the last three years. Carrying over this legacy backlog means that the first quarter margins do not yet reflect the impact of the number of measures launched in the last months under our V20 transformation plan. These measures include, but they're not limited to a dedicated business unit with sharper market focus, which I'll be talking about in a few minutes, much greater and rigorous project selection and pricing. We've become a lot more disciplined or careful I would say in selecting projects we want to quote with an eye on margin and pricing and we've expanded our low cost supplier network in Asia, which we continue leveraging increasingly more. The combined effect of these measures is expected to gradually take effect in the course of this fiscal year and next year, but the greater impact and that's an important part of my message, the greater impact of our transformative V20 initiatives is only expected late in fiscal year twenty twenty one, namely calendar year 2020, when the task of reorganizing and reducing our North American footprint will be completed. Sales, order bookings and backlog sales amounted to $83,800,000 an increase of $5,900,000 or 7.6% from the prior year. Sales were positively impacted by an increase in shipments from our Korean, Italian and North American operations, which was partially offset by a decrease in shipments from our French operations. The increased sales volume for the quarter is primarily attributable to the higher number of orders booked in the prior fiscal year and the shorter lead time MRO business, which was partially offset by lower sales from our French operations due to the timing of the delivery of certain of its large project orders, which are scheduled for the latter part of the fiscal year. Bookings decreased $22,000,000 or 25.5% for the quarter. This decrease is due primarily to lower orders booked by our North American operations, which had seen last year an unusually high surge of non Project Now restocking orders from our distributors in the first quarter of the prior fiscal year. MRO distributor orders this fiscal year are expected to reflect a more normalized stock replenishment cycle. The decrease in bookings is also due to lower project orders booked by our French operations. We ended the period with a backlog of $423,000,000 a decrease of $26,400,000 since the beginning or 5.9 since the beginning of the current fiscal year. The decrease in backlog is primarily attributable to the weak book to bill ratio of 0.7 dollars in the quarter and the weakening of the euro spot rate against the U. S. Dollar over the course of the current quarter. Financially speaking, our financial position, want to say a few words about this. While our financial performance for this fiscal year has not been satisfactory to date, we continue to have a strong balance sheet. Net cash settled at $39,400,000 at the end of the quarter, a decrease of $1,500,000 or 3.7% since the beginning of the quarter. The net cash per share was $1.82 or CAD2.46. Our equity at the end of the quarter settled at 299,700,000.0 or $13.86 per share. In Canadian dollars, our equity per share was $18.75 Canadian at May 3139 compared to our TSX share price at the close of business on that day of September indicating that our share price continues to be undervalued. Now, talking about our strategy, again, bringing all the pieces together to explain our V-twenty plan. As I said at the beginning of this conference call, I'm not satisfied with the results. FY 2019, as I reported the last quarter conference call shows showed a glimpse of recovery, a great improvement, notable improvement in the gross profit, even facing the headwinds that we're facing. But I'm not going to tell you that I'm satisfied. The company is going through a very challenging period, which mandates a lot of big changes at the same time. As you know, it's not the same market environment as a decade ago. It shifted massively and fast in the last ten years. And the fact is that the company was not ready for it. We had systems and processes that needed to be upgraded. The way our business is structured has to be changed and all of that means that our business model was simply not suited for a new competitive environment. We're still facing external challenges like asbestos, but this is under control. Many of these investments that I just referred to started in the last three years. They're all necessary to bring the company mainly, and I insist on that, North American operations back to levels where the company could successfully compete. It is a big shift to turn and yes, is and was as I said last year slower to change than expected, which is why we decided to go deeper and truly transform the business model, which led to the V20 decisions, which were approved unanimously by the board and announced back in January. It's about rethinking the North American business structure, not just the footprint, but the business model and our approach to market. It's a big move. It's not just closing a plant. It all amounts to creating winning conditions that are not going to be present unless we change the business model. So the decisions that led the factor that led to those decisions, when we talked about the North American situation is that we have overcapacity in our with our four North American plants. The plants are not configured optimally to meet the market conditions that we're facing. We have generalist plants that combine many, many different products, which makes it for very high variability and product diversity. So overall, my point is that the greater of our focus going forward with V20 is addressing our North American manufacturing operations in the way we go about marketing the products. We have a very solid foundation. I'll conclude my message with this. When you look at the rest of our business globally, the subs are doing well overall. So it really is about addressing the fact that our North American performance has seen declining results in the last five or six years. A few months since the announcement, the company is fully engaged in a major transformation. We're adapting our business model and building capabilities and assets that the company did not have before North American sales started their decline six years ago. Let me summarize the most important cornerstones of our strategy. Modernized operations and technology enabled processes, more targeted go to market strategies and increased end user focus and a global manufacturing strategy designed to support our customer focus strategies. The vision is to transform Vellum by making it less dependent on the industry cycles and better able to shape its own fate by dictating the pace and better selecting its customers. Our commitment is to grow both sales and profitability. Four decisions will enable this vision. Let me go through them quickly and then I'll update while I update you on the progress. What were those four decisions? Number one is we restructured the Land North America into three strategic business units MRO and aftermarket, project manufacturing and severe service. The second decision was to modernize and specialize our VNA plants in addition to connecting them to the new business units. The third decision, which is the one that caught the most attention was the closure of one of our four North American plants, namely Plant Two-seven in Montreal. And the fourth decision was to speed up our investment in upgrading our business processes and systems. They're all integrated together. It really is a whole and it is not only about closing a plant. The three business units are now in full flight. Rob Zellen is in charge of the MO and aftermarket, which is focusing on leveraging our installed base from three different angles, replacement valves, spares and services with a much greater focus on serving the end user. And Rob will be managing largely an Asian supply chain. Volgeng Maher is in charge of the project business units, mostly power and nuclear petrochemical project contracts. His job is to make sure that we sharply target attractive applications and improve execution and cycle time and he will be benefiting from a very focused Granby plant where we will specialize and concentrate multi turn project valves. And last but not least is our severe service business unit, which carries we believe significant growth potential will consist of quarter turn products for process industries and also Navy. And the name of the game there will be proactive sales engineering and license approvals and Duke Tran who is leading the business unit will be benefiting from a specialized Montreal plant, where we will invest in upgrading our R and D operations as well as increasing our focus on technology for those valves where we see as I said great growth potential. So as I said, these are four decisions that come together and the one that drew the most attention is the closure of Plant 2.7. Let me give you a bit of progress update on this. Of course, it created a shock with all employees. We are creating more jobs in Granby, but that will have an impact on employment in North America. And you may have noticed that the negotiation or discussion we're having with the unions have now joined the public space. All I want to tell you is that those discussions are going well. The idea is to do it together with the input from the unionized employees to see how we can minimize the impact of unemployment. But the fact of the matter is that we are closing a plant, but we are investing in upgrading our two other plants in Quebec and that is a testimony to our dedication to growth. This vision that I just described, which is about making Velen less dependent on industry cycles and better able to shape our own fate but with a greater market focus, we're harnessing or linking to specific top line and margin improvement goals and we've equipped ourselves with the means to deliver them. We've set up a transformation office as soon as we receive board approval, The resources are fully deployed and things are progressing to plan on all fronts. I want to conclude with a summary of where we stand today and refer to what I like to call the step stones to Valens return to strong operational results. First of all, we have a strong foundation and tailwinds that we can benefit from. What are those foundational elements and tailwind factors? We're expecting a heavy surge of Navy orders, which we've already started entering in the course of the last few months. The Navy is building new aircraft carriers and we are on the frontline as a traditional and well appreciated supplier of valves for the Navy. So that will be coming in the course of the next eighteen months. And as I said, we've already received good orders from our Navy customer. We have a strong MRO installed base that's global with existing high performing distributors along with new distributors and I believe that the new business unit that's been established headed by RockVellen is going to have success in with the increased focus leveraging even more. Valen Italy has a record backlog and their very focused strategic plan is an indication of the success we want to have with our dedicated business unit in North America. They're focusing on FPSOs, which are floating production storage operations that are temporary oil exploration platforms in the Deep Sea and we are a supplier of choice for our core customers there. We have strong and profitable French operations and recent license approvals supporting our severe service business are a good step in the right direction in terms of capturing the growth potential with our severe service business unit that I just described. Second step stone are the structural cost and margin improvements that we're driving. We're reducing the North American footprint and the production overhead. We're reducing our SG and A that will come with it. As I said, most of that impact will come late next calendar year. We're going to be leveraging our engine plant with less complex valves a lot more. We're driving material cost savings through an improved and expanding supplier base in Southeast Asia and our higher margin severe service growth is expected to drive growth in margin as well. So these two platforms or step stones have a strong likelihood of happening over the next two years. And there's a third step stone, which I connect to our SBUs and the modernizing of our business. When we invest and continue investing in digitizing and modernizing our systems and processes, the connected and more focused plants supporting our SBUs, are going to be focused on focusing on end users a lot more. We're introducing new products. We expect that our new approach to project manufacturing, greater selection and pricing discipline that I referred to will drive margin growth. These are the key elements of our five year growth plan and they're greatly enabled by the V20 change and investments that we're now deep into carrying out since the announcement in January. So to summarize what we're doing, plan is a very straightforward plan. It really is about focusing more on end users, aligning our supply chain to our market strategy, leveraging more low cost base with India and reducing our production overhead structure by streamlining our production capacity in North America. It involved very difficult decisions. We can't underestimate the size and importance of all those decisions. And at this stage, we're deep into deploying those actions and managing all stakeholders at the same time. My point is that fiscal year twenty nineteen gave us a glimpse of a promising recovery. But as I said, we're not out of the woods. The execution of the plan requires significant and well planned investments and I'm very thankful for the Board's support and unanimous approval of it going forward. And in the end, management believes it has the mandate and the means to carry out the plan that will bring back the land to strong and consistent profitability. And I'd like on this to thank you for your attention and get ready for questions if there are any. Thank And we have no questions at this time. Okay. Well, we had the benefit of getting a lot of questions at yesterday's AGM. So I suppose most of them were made already. On that note, I'd like to thank everybody for your attention this morning, and I look forward to meeting again at our next quarterly call. You. Does conclude We the conference call for thank you for your participation and ask that you please disconnect your lines.