Velan Inc.

Hello and welcome to the conference of the French Telephone Association, presentation of the results of the fourth quarter of 2022. Greetings and welcome to Val and Inc. Q4 Financial Results. During the presentation, all participants are in a listening mode only. A period of questions will follow the presentation and you can ask questions in French or in English. And if you want to ask a question, press 1 out of 4 on your phone. If you need to speak on the phone, press 0. If you need to reach the operator, press 0. We remind you that today's conference is recorded on June 20, 2021. And as a reminder, the is being requested Thursday, May 19, 2022. I now like to turn the conference over to Bruno Carbonaro, Chief Executive Officer and President. Please go ahead.

Bonjour and bienvenue. Welcome to our investor presentation to review the results of the fourth quarter of the fiscal year 2022. I'm joined today by Benoit Alain, the CFO of the company. And I start by briefly presenting and commenting our results for the Q4 and the full year and then giving you some elements on the outlook. We then will open the line for your questions. First, to start, the usual disclaimer, I'll let you a couple of seconds to review it. It's nothing new, but it's absolutely mandatory. Without further ado, let's comment on the highlights of the fourth quarter of the fiscal year. So the sales are mounting to one hundred and twenty five million, which is a big increase versus the same quarter of the previous year. Some of it is linked, especially eight point eight million of that are linked to the reversal of some performance guarantees. But even if we exclude that, this quarter is the best of the company in the last five years. In terms of EBITDA, sixteen point six million, which is a big gap versus the one point six million reported for the same quarter of last year. And paradoxically, we report a net loss, which is surprising. But basically, as you may see on the slide, the big explanation of that is a derecognition of thirty two point six million of different tax assets. In terms of backlog, we still have a very high backlog of both five hundred million, even if we recall that our book to bill ratio is below one, only eight point eighty eight percent. But I'll expand further in the next slides on that. And to finish this, I want to comment on the strong net cash position of the company, which is above fifty million. And at the same time, as I will explain later, we were able to reimburse a fair amount of our outstanding debt. Now, having a look at the EBITDA on the left of the slide, you have a historical view of the EBITDA on the quarter per quarter basis. And as you see that the third quarter in a row where we can just report a very nice EBITDA and there is a big contrast between what you see for twenty twenty two and, for example, what you've seen in twenty eighteen and twenty ninety. Now, to the right, we have to give you an explanation of the variance between the sixteen point six million of this year and the one point six million of last year. And I focus my attention on the two first bars. Basically, at the same time, we increased immensely the volume and we mentioned the margin, which is always complex in our business, not having to compromise on prices to make your volumes. And basically we found the way or just we both the thin line to be at the same time, increasing the volume of our bookings ourselves and also maintaining the margin at a more than acceptable level. Then I like to comment on how we generate the cash because EBITDA is good, the cash is king. And you see to the left, you know, the transformation from EBITDA to free cash flow, six point seven of free cash flow out of an EBITDA at sixteen point six. I would comment this performance as fair. It's not where I'd like just to be. And you see the four, the three, four bars that explain the variation of our working cap with a good performance and inventory that are still too high, but are decreasing for the quarter. And the AR that are increasing mainly to timing, you know, impact of ourselves and the AP that are also decreasing, which is not what we expected. But basically, rest assured that we are actually and currently working on that to increase the ratio of transformation from EBITDA to free cash flow. And to the right, you have the usage of the free cash flow we had. So you have the starting position in terms of net cash of sixty eight million. Then you have the free cash flow. Then you have the disposal of Q1 and then you end up, you know, with the cash position, which is here sixty point five million, out of which you have seven million of short term investments. So technically it's not cash, but if we need to transform that into cash, it's easy. It takes some time, but there is no problem in terms of just from that into cash. Now, let's have a look at the full year. I've mentioned before the sales for the full year amount to four hundred and eleven million, which is the best. We have the best number in the last five years, but I'm very proud of the second bullet point, which is an increase of our gross profit of six hundred and ten basic points from twenty six point seven percent, which was fair to two point eight, which is good. So basically you have a lot of effort behind this number. And basically, it gives you a sense of the health of the business at the land. In terms of the data, you know, the figure sticks by itself, almost forty million of data, which represent one point eight dollars per share. And it's a more than double the results we published for last year in terms of loss. I already explained why we have a net loss, which is linked to exceptional items. And I think that it's important for to report to you that as a result of the good performance of the company financially and the healthy cash position, the bull has proved a eligible quarterly dividend of three cents per share, which was what we had in place two years ago. So that you will reinstate something which was going. And I'm happy that we can share with our shareholders some of the value we created. Let's now move on to some elements of perspective for the company. As I mentioned to you, the backlog is still healthy, above five million is a book to bill ratio below one, but it's not not very, very low. And what is extremely important is the portion of the battle, which is shipable in the next twelve months. And if you go to the right of the slide, you have the stack bars and the bottom part of the bottom portion of the second bar, are exactly what we can ship in the next twelve months. And you see that it's about the same number as last year. So basically what we are saying is that the backlog we have is sufficient for us to make decent numbers next year. So basically it's good and we continue to

to have,

I think, a good traction on the market for the bookings in the first two months of the year. To try to give some color around our bookings, as we did last time, last time we presented to you a job we acquired for a refinery in Egypt. We decided just to to highlight here, not a single project, but the very loyal customer that most of you know, if you have been part of the industry in North America in the last 30 years, their name is Sunbelt. And basically you can just have a description of who they are. But I want just to emphasize the fact that it's the type of company we have a partnership with. So basically what I call a partnership is shared efforts to promote towards the end customer the value of our product lines and our brand. And basically you see that the efforts that we have together currently are around HFAC, BALT and COCR product lines. And basically what is good is it's important for them. It's important for them and we work together. And it really is a good indication of the type of customers we want to favor in the future. So basically we believe that the future of Balan is around our key customers, key accounts and we put in place, you know, a very clear management of our key accounts to make sure that they grow with us, we grow with them. So basically we have a joint future and Sunbelt is obviously one of those loyal customers that we will help grow and that they will help us grow. On this page, which is pretty unusual, you see three pictures and you see two pictures for CFOs. So basically it's normal because Benoit Alain, the CFO in place, we stepped down in a couple of days as we have announced to the market in December. And I want to thank him for what he did during his tenure that a little bit more than one year basically helped us modernize our island processes and systems. And I can tell you that I see the difference now compared to one year ago. So I'd like just to wish him well for the next step in his career. And I'd like you to join to welcome, I'd like to, sorry, to welcome Rishi Sharma. He is an excellent complement to the team. As you may have seen, he has an amazing professional background and I know that he will tremendously help me and the company grow in the future. Now it's time for me to open the floor for any questions you may have.

And if you'd like to register a question, you may do so by pressing the 1 or by the 4 on your telephone. You'll hear a three-tone prompt to acknowledge your request. If a question has been asked or to draw your registration, you can press the 1 or by the 3. Again, you can ask questions through 1-4, so 1-14, and you can ask your question either in French or in English. Our first question comes from Michael Dumais, private investor. Go right ahead.

Hey, good morning, Bruno. I've been a lot. Nice quarter. My first quarter, or my first question was really just maybe asking for a little bit more color, a little bit of overview and general outlook on your specific end markets, specifically, how meaningful could the higher energy prices and MRO activity be for you in the near and medium term?

Okay. Just I can tell you, you have a question which is short-term and mid-term. Short-term here, we are in a very complex environment where we have a war, which is in Ukraine. And when there is uncertainty, we're in a capex business. Anytime there is an uncertainty on the market, even if, you know, when you see the prices of commodity going up, like the price of energy going very high and then decreasing, and people are thinking about recession, it's extremely difficult for decision-makers to make decisions around new projects. So basically what we see in our end market is we continue to have a high trend for MRO because it's basically maintenance or small capex jobs. And here there is traction on the market, but for anything which is measured, it's a large investment. It's a little bit complex for our customers to sanction their project. We see a lot of quotations going out. We have a lot of quotation activity, but the timing of the project are completely unsure. So basically we knew last year that it would be soft and we were expecting some rebound on the market in Q1. To be honest, I think Ukraine is taking a toll on the ability of our customer to make that decision.

Okay, no, that's helpful. I appreciate the comments there. My second question is on the provision taken in the quarter relating to the ongoing asbestos litigation. Do you now think that you've fully provisioned for all future expenses? I'm just trying to make sure I understand the MD&A correctly because it does feel like the number is relatively light versus maybe some of the prior expenses in the quarter. So just maybe provide context as to what we should expect going forward.

What I suggested is Benoist will answer because it's very technical. And I want to make sure that exactly it's clear what we put in the MD&A. It seems very clear that Benoist could elaborate on that. Yeah, well, in the asbestos there's three components. There's the claims that we know we will settle, claims that we know that the chance of settling or a slow number is high. And the third one is all the future claims. This year we took a more conservative approach versus previous year. We see the total expense for the full year is 25 million asbestos. 12 million is related to the same method as last year. So essentially we take a provision on the first category I mentioned. But this year we decided to, as I said, take a more conservative approach and we took a provision on the first two. We still don't make any provision for future claims that we didn't receive yet. So that's the current service solution. But again, this is definitely a lot more conservative than previously. And those numbers, those extra expenses are part of our EBITDA this year.

Understood. So the expenses going forward should go down but not disappear. Is that the right way to think about it? You're absolutely right. Okay. Okay, thank you. And then I guess I'm going to ask one more. I don't know if there's anybody in queue, but I'll ask a couple more. You know, in terms of the balance sheet and the cash flow, you know, nice to see the improvement in the ARs. You still have 180 days in inventory. I mean, that's – your inventory position is actually larger than your market cap. Any way you can give us a sense for, you know, what the longer-term objective is in terms of getting the inventory and the working cap in the right place and just, I guess, the time it will take to get there and the final destination?

Yeah, I'll explain. The question is very relevant, so thanks for asking. Basically, it's a little bit complex for us to stabilize and decrease our inventory at the moment where we have difficulties to ship. And basically, we still are impacted by the impact of COVID-19, the difficulty to get our goods out of China and India. A lot of our customers are just finding reasons not to take possession of the goods. So basically, in the inventory, what is important is to go a little bit deeper on what's, you know, raw material, what's finished parts, what is whip and what is finished goods. I can tell you that we are spending a lot of time on that. Basically, what we hope is that when we have finished with the high repercussion of, you know, the COVID-19 and the war in Ukraine, basically, we will be in a position to reduce immensely. And I think that it's – or sizably, if I may be precise. The problem is to do that and to do that not only in North America but all over the world, we need to put in place a project that will be led by Rishi. And basically, it takes a stand. So don't expect, you know, a miracle in the next first quarter. But it's definitely a long-term objective for the company. And to give you an example, you know, on the viable pest structure of our companies, not only in North America but also outside, we introduced, you know, the cash distribution and the working cap as one of the key elements we based our pilot pay on.

That's helpful. Thanks. And I guess just an extension to that. I mean, you know, nice to see the dividend reinstated. You know, it looks like profitability has moved, you know, thoroughly in the right direction. Cash flows are getting better. You know, the balance sheets, you know, I'd say more than sufficiently capitalized. How should we think about, you know, additional capital deployment going forward? What your thoughts are in terms of return of capital versus M&A?

It's a very broad question. You know, that's a bit complex for me just to be very precise on what I would be saying. The good news is we generate cash. And the good news is we're in an industry where you have a lot that is going on. And basically, not only we are generating cash, but our profitability is good. We must probably be among the people that can set the tone in the industry. How, when is completely unclear. But basically, the good news is now we can have our destiny in our hands, and it's much more convenient than most probably a couple of years ago.

Yeah, I would agree. Nicely done in the ear. We have a lot

of other people coming up for questions. I don't know how to manage that, but I don't want just people being frustrated by only having one person discussing with me. So sorry to be rude, but I see that I see questions on the Q&A. So how do we proceed? I don't know. What I suggest, Tommy, if we can move on. And Michael, if you have other further questions, maybe go back on the queue to let the chance for other people, please.

Thank you very much. We'll proceed to our next question. And the pressure cash. Oh, sorry. Beyond the Stephen to taxi to luster acid management. Our next question from Stephen to taxi luster acid management. Go right ahead.

Yeah, sorry. Can you hear me?

Yes.

So I also sent them through the chat. So the first question was, what are the normalized margins when you back out the reevaluation of performance guarantees and the Canadian wage subsidies for the quarter and also for the year? So that would be my first question.

It's about for this quarter. It's about an impact of five percent. So when you look at that, when you look at our gross margin, 38 versus 27 last year, and if you take out the 8.8 million, it would give up about 30 to 33 percent.

Okay. And there is there still some Canadian wage subsidy in this in the latest quarter? No. Okay. It's zero in the quarter. So when you're referring in your in your M.D. and a to less wage subsidies this quarter, they're actually zero, both in the cost of goods sold and in the S.G. and a. Correct. Yes. Okay. The other question is, and you sort of touched on it a little bit, but are you are you facing some because you have operations in China and clients in China, are you facing supply chain issues there or elsewhere currently?

Yeah, we still have the conviction in the port of Shanghai, which is completely congested. And it touches at different levels. First is, yeah, in the actual supply of goods coming from China, but also, you know, now there are more competition in supply chain that is moving to India. It's more difficult also to get our goods from India, even if there is no port congestion, but basically they are just overwhelmed by the workload. And then the third thing is, is it has an impact on the bookings because basically there is difficulty to get access to goods and that the pricing are changing from one day to the other. It's extremely difficult just, you know, to find an agreement with the customer on the price of the day. So basically, yeah, we are continuing the supply chain and the price increases and decreases of the commodities as an impact on the performance of the company and still have.

Right. And so are you still like, what's the margin objective? Are you still trying to maintain margins in the, you know, gross margins in the 30 to 35 percent ranges? Is that a fair assessment?

Here, we reported, you know, last time we discussed about our different markets and basically intrinsically our five BUs have different targets. And depending on the mix, you know, it could change because basically you don't have the same for MRO or SSBU. I give you two extremes. And basically, so basically what we expect is that we will maintain on the BU per BU basis the same post margin this year than last year. But then you have the mixed effect that I won't comment on. Okay, sorry, I missed that. You're trying to maintain the what? Sorry. You know, we have five strategic markets. What I'm saying is the strategic market has a target of 25 percent like the last year. Our target this year is to maintain or to exceed these 25 because the 25 is the combination of prior margin and prior year's margin in each market. And that was my point. Sorry if I was not clear. Okay. And then finally,

you know, appreciate the dividend, but it's very paltry and it to me doesn't add any value to the shares. You know, why aren't you buying back your grossly undervalued shares, which would be much more accretive to all shareholders than reinstating a dividend? It makes no sense to me.

Most of all, you have the board that should address this question. I'm not sure I'm calling scientists to do that. The good news is that the board approved the dividend and I think it goes in the right direction.

Yeah, but a better use of capital would be to be buying back your your your shares, which are trading at less than liquidation value as as a prior question that pointed out. Okay, thank you.

Thank you very much. Thank you very much. As a reminder, I'd like to ask any other questions or comments. Could you send out a person to your one for on your telephone keypad? And the question in English. Our next question is from John Francois. Yes,

hello. I would like to know if you could give a little bit of a ventilation of your sales per sector, whether nuclear, maintenance, the navy. I want to know a certain percentage, I don't know if it's possible.

We don't do it. We decided not to do it for all kinds of reasons. So the question was, do we can we give a split between the different parts in the segments? And the answer is we don't do that and we have no intention to start doing that for for for obvious competition reasons. So that that's we don't want our computers to know. So basically, yeah, you can just have a trace of what we can offer in our different communications that we won't be more specific.

As a question, you know. For competition, there is

still. For competition, but

yeah, because there is still a difference between the defense sector and the maintenance sector, as it could show.

Effectively, Jean-François, it's Benoit who speaks, there are indeed differences. As Bruno said, we don't report them specifically. On the other hand, from a geographical point of view, it was reported in part six of the MDNA. And without it being reported specifically, we know that France is heavily affected by nuclear. For example, Italy is oil and gas, upstream, FPSO. It's already giving an indication.

OK, I have a second question. I think it was already asked, but I didn't understand it well. Because in the provisions for the problems related to the amnesty, you know, in the current provision, you put a provision of four million. So I think in the last annual reports, it was still, there were still costs associated with that of 10, 11 million. So I just wanted to know why it had been decreased.

In fact, as such, the cost that goes to the state of the results, this year it was 25 million. Of that 25 million, there are 12 million that is, I would say, according to the same method that we used in previous years. And there is a 13 million extra. And this 13 million is linked to, as I said, we receive, we have a basket of claims. And from that claim, historically, we provided only those we were certain to regulate. Now we have extended a little. However, we still do not provide future claims.

So if you, if you, let's say, have a pursuit next year that is a triple, that has not been put in the provisions at present?

A new

pursuit that

would be

registered is not in the provisions. Okay, perfect. And the last question, I wanted to know for the, for the taxes, in the sense that you have operational losses in some jurisdictions that you never think you can make profits to use them. That's what I understand.

Not quite. That is, we actually have losses that are always available in certain jurisdictions, that are always available. Although the management, we think that eventually we will be able to use those losses from a purely technical, accounting point of view, and I would say with a little conservative source, we decided to eradicate them this year,

simply. What could we know, what are the most, what are the losses, how the losses are taken, in the most important way?

We do not report the information by jurisdiction.

Okay, perfect. But in the sense that they are not, they are lost from an accounting point of view, but if one day the company makes profits in a certain jurisdiction, it will be able to use them for, it will be able to use them against the losses. It is always from an accounting point of view.

Absolutely. Absolutely. These are not losses that came to an end and that we lost.

And we still have more to come. Okay, we still have losses. That is not the case here. Okay, perfect. Well done, thank you very

much. Thank you,

Jean-François.

Merci. On a note, question encore une fois de Stephen Tacaque, CDL, Leicester Acid Management. We have another follow-up question from Stephen Tacaque, CDL, Leicester Acid Management. Go right ahead.

Merci. Just a follow-up question to the previous gentleman's question on the asbestos litigation. So if I understand correctly, of the 25 you said, 12 is by the previous method of claims that are settled during the quarter, and then 13 million is a provision for future claims. So to follow up on the same line of thinking as the previous question, if you receive a new claim, is that going to be automatically expensed or is it just if the accountants feel that that claim needs to be provided for? In other words, the 13 million that you've provided for, is that all the future claims that have been issued against you or those are just the ones that are the most likely to be settled? Because if you get another claim for tomorrow morning, is that going to suddenly show up in the P&L for the current quarter?

Actually, there's nothing, no provision for future claims. So it's just that before we were taking a provision for claims that we were sure to settle, now we take a provision for all the claims that we have.

And that'll be every quarter? Everything that develops... So as you receive, as claims are filed on an ongoing basis, because this has been going on for a long time, as you know, then those will automatically just appear during the quarter, whether they're justifiable or not. Exactly. Okay. Merci beaucoup and congratulations on the much improved results. I don't want to be overly negative, but a lot of progress has been made with the turnaround plan and by your predecessors and by the current management team. So, you know, well done on that.

Thanks. Thank you very much. Mr. Cabanero, we have no further questions on the line. I'll get back to you.

Okay. So thanks a lot for your attendance. Just to let you know that the presentation will be posted on our website in French and in English. So don't hesitate to refer to that. And if you have any further questions, you know our details, so you can just call us. Thanks a lot. Have a nice day.

Merci beaucoup. C'est la conférence téléphonique 'aujourd'hui. Nous remercions de votre participation. Nous vous demandons de mettre la marque à chier. Merci et bonne journée. That's the comfort call for today. We thank you for your participation and for disconnecting lines. Have a good day, everyone.