Velan Inc. (OTCPK:VLNSF) Q1 2023 Results Conference Call July 8, 2022 11:00 AM ET
Company Participants
Bruno Carbonaro – President and CEO
Rishi Sharma – CFO
Conference Call Participants
Stephen Takacsy – Lester Asset Management
Operator
Greetings and welcome to the Velan Inc. Q1 Results Conference Call. During the presentation all participants will be in a listen-only mode. Later, we’ll conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being record Friday, July 8, 2022.
I would now like to turn the conference over to Bruno Carbonaro, Chief Executive Officer and President. Please go ahead.
Bruno Carbonaro
Hello, Bruno Carbonaro speaking.
Before starting the presentation, I’ll just present the usual disclaimer. We are just presenting our results for the first quarter of the fiscal year ‘23, ending on May 23, 2022. There is a usual comment on the non-IFRS financial measures and we have also the usual comment on the forward-looking statements that you’re used to.
I’m joined today by Rishi Sharma, our new CFO, that will help me just conduct this presentation. At the end of the presentation, we will be more than happy to take any questions you may have, and answer that if it’s possible.
To start, I’d like to present our new Board of Directors that was elected yesterday. So, there’s a lot of very familiar names with two changes are that we have Bill Sheffield and Robert Raich that stepped down and in place, we have Peter Velan who comes back to our Board of Directors.
Now, the highlights of the Q1, I think you are now used to these slides and the format. So, basically in terms of sales, it’s $75 million of sales. So, it’s at par with last year. I would not be honest if I didn’t say that I’m disappointed. We should have done more. But basically, we can explain why it’s only $75 million. It translates into an EBITDA of minus $2.9 million, which is a little bit lower than last year. And the main explanation is an increase of the admin costs, especially due to the outgoing freight costs. The net loss is in sync with that, minus $7.4 million. But the good news and it’s extremely important that is we continue to have a good visibility on our activity with a backlog, which remains at a higher level with $506 million and obviously a book-to-bill ratio, which is referable at 1.25.
In terms of liquidity, we still enjoy a very nice liquidity position with more than — almost $48 million of net cash. Obviously, there is a decrease from the beginning of the quarter that would be explained by Rishi, later in this presentation. And it’s due to the low EBITDA combined with an increase in inventory and primarily of work in progress that has really boomed during the quarter due to some difficulties to shift some large orders.
Back to the backlog, here on the right you have that visibility on the side of backlog. So, you can just see that it remains at the higher level. And we also committed on the part of the backlog which is shippable in the next 12 months and it remains at about the same amount which is $340 million. Okay?
What is important to notice is that there is an impact of us not shipping exactly what we wanted to ship. But, the second impact, which is extremely important is part of our backlog is labeled in euros, especially our nuclear business in France, as most of the sales in euros and the decrease of the value of the euro during the first quarter had an impact on the size of the backlog of almost $13 million.
I’d just now handover just to Rishi, just to help us better understand the split of our sales and of our EBITDA and our cash.
Rishi Sharma
Thank you, Bruno. Thank you. Good morning, everyone.
So sales as mentioned, comparable to prior year Q1 at about $75 million or 0.6% higher. The increase in sales is primarily attributable to shipments of our large Italian operations, as you can see from the pie charts there, almost double versus prior year. When you look at our foreign subs and our operations outside of the three core markets here, you see there is a 6.5 versus an 8.5, I think the third party sales improvement there has given us a pickup. When we look at France, slight decrease versus prior year and in North America, as Bruno had mentioned, some impact on delays of shipments that we’ve seen.
When we talk about delays, so we say really comparable year-over-year. However, the expectation for us was a bit higher. We did experience some delays, resulting from supply chain and logistical issues, the attention of customer export permits for inventory that was ready, which you can tie into our near completed WIP and our finished goods, and final negotiations in process with certain customers.
If you look at EBIDA, I mean, Q1, generally and historically Q1 is soft. We do have a bit of a higher reported EBITDA loss here, which is $0.13 of a loss per share. The unfavorable movement for the quarter is primarily attributable to an increase in admin costs, selling cost. As Bruno had mentioned, some pressure on supply chain logistics and outbound freight cost for final delivery, delays in obtaining of shipping containers and the resulting impact there. And if we do compare EBITDA, but maybe a step higher on gross profit, in the prior year, we did qualify for Emergency Wage Subsidies, which was about $400,000 on the gross profit and $600,000 in the admin. Our gross profit is improving from 26.1% normalized last year to 26.8% in the current year, which really is a focus and an emphasis from our V20 operational restructuring and the emphasis on contract execution.
If we look at the bridge really from EBITDA to free cash, so the big impact on our burn of free cash flow minus $4 million is coming from the EBITDA loss of minus $2.9 million. What’s important to note is significant collections in the quarter, primarily coming from a large revenue and billing cycle in Q4, so a good reduction in our AR, which has helped us.
On the inventories and other working capital movements, as we tie this to some of the shipments, we were prepared for delivery, we do see an increase of about $12 million, $12.2 million, which we do expect to be recovered throughout the course of the year. And finally, some increase in interest tax and other expenses with adding on that our normal, about $900,000 million to $1 million spend per quarter on CapEx, which brings us to our minus $4 million free cash flow.
What’s important to note is, although there is a burn, slight burn on the free cash flow, our net liquidity, net cash remains very strong. So, at the end of Q4, we are in a $53.5 million net positive cash position. This positive cash position drops to $47.7 million. The driver here really is free cash flow. We have a net, net of $1 million increase in long-term debt and on the FX revaluation of our cash on hand, a drop in $1.8 million for reporting purposes.
With that, we summarize kind of the key metrics. I’ll pass it back to Bruno to close on the comments for Q1 and essentially what we see for the focus for the rest of the year.
Bruno Carbonaro
Thanks, Rishi.
I think, as usual, we don’t provide any guidance, but I’d like to provide you some visibility on my key tasks. First is to focus on execution. We know that we need to improve our execution. So, it’s my top priority. And we ensure that — we want to ensure that we can really meet our deadline for shipments. And it’s a combination of manufacturing on time, but also just fixing all these logistics issues, inbound and outbound. So, that’s really a good focus — a good portion of my time will be focused on that.
Second thing is we truly believe that we have in front of us strong Q2 and strong end of the year. So, we have the backlog. If we are disciplined in execution, we don’t see why we can’t just have the same type of years than last year. However, I think, as everybody knows, the economy is moving very fast, lots of volatility in terms of completion of raw material, in terms of recession, in terms of geopolitical uncertainties not only in Europe, but also in Asia. So, it’s moving fast, we need to stay attentive to that and make sure that we are making the right decision to be always in a position to deliver goods to our customers.
We enjoy a very strong backlog and we see a strong pipeline of opportunities. And we absolutely want to preserve our strong liquidity and cash base. And the name of the game here is to have an active management of our working capital. That’s what we did during Q1. So, we are on top of that, and we want to continue to really be extremely disciplined in the way we look at the capital and we can get our money back from our AR.
So, that was my comments for the rest of the year. And now, both Rishi and me are at your disposal to answer any questions you may have.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from Stephen Takacsy of Lester Asset Management. Please go ahead.
Stephen Takacsy
Hi. Could you just give us a little more detail on why the admin costs are so high? I thought the idea was to sort of bring those down as part of V20 and quantify what these additional freight and shipping costs were and also what charges were booked on the usual asbestos litigation as well?
Rishi Sharma
Hi, Stephen. It’s Rishi. So, on your first point, absolutely, the focus was and is on the admin costs. On the outbound freight, if I can comment, there’s operational mitigation there. So, with the delays and us being able to secure outbound freight whether it’s containers in order to protect delivery time, in order to protect LDs on contracts, we make choice to avoid those and pay a little bit more. There’s a mitigation plan in place with the global sourcing team now that we look at with freight forwarders and so on and so forth. So, we expect this to taper off.
On the second point for asbestos, I would say in line with prior year. So, no movement or no significant movement with what we booked in prior year for Q1.
Stephen Takacsy
Which is — can you give us the number?
Rishi Sharma
It was $4 million, $4.5 million, I believe. $4.3 million.
Stephen Takacsy
In the quarter?
Rishi Sharma
In the quarter. Yes.
Stephen Takacsy
Right. Yes. I know that’s a big number obviously, cuts in the EBITDA pretty harshly. So, is there any plans to kind of deal with that going forward in a different manner? I know the accounting treatment changed year-end, but is there any anything going forward that the Company is working on to try and mitigate these costs?
Bruno Carbonaro
Bruno speaking. As we already said, we monitor the situation extremely closely and we just adapt our strategy to the latest news we have.
Stephen Takacsy
All right. That’s it for me. Thank you.
Rishi Sharma
Thank you, Stephen.
Operator
[Operator Instructions] I show no further questions at this time. I’ll turn the call back over to our speakers for any closing remarks.
Bruno Carbonaro
Nothing to add. Thanks for your attendance. And we’re still happy to answer any question in private, if you have.
Operator
Thank you. This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.
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