Velan Inc.

Bonjour et bienvenue à la conférence téléphonique, présentation des résultats du quatrième trimestre de l'année fiscale 2022. Greetings and welcome to Verlaine Inc. Q4 Financial Results. Pendant la présentation, tous les participants seront à mode d'écoute seulement. Une période de questions suivra la présentation et vous pouvez demander des questions en français ou en anglais. Et si vous souhaitez poser une question, appuyez sur le 1, sur le 4, sur votre téléphone. The presentation participants will be in a listen-only mode. After this, we'll conduct a question-and-answer session. You can ask a question either in French or in English. At that time, if you have a question, you can press the 1 followed by the 4 on your telephone at any time in the presentation. If you need to speak on the phone, you can press the 3 followed by the 0. If you need to reach an operator, you may press the star followed by the 0. We remind you that today's telephone conference was recorded on Thursday, And as a reminder, this call is being recorded Thursday, May 19, 2022. I now would like to turn the conference over to Bruno Carbonaro, Chief Executive Officer and President. Please go ahead.

Bonjour et 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 Allain, the CFO of the company, and I'll 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 125 million, which is a big increase versus the same quarter of the previous year. Some of it is linked, especially 8.8 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, 16.6 million, which is a big gap versus the 1.6 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 de-recognition of 32.6 million of different tax assets. In terms of backlog, we still have a very high backlog, above 500 million, even if you recall that our book-to-bill ratio is below 1, so it's only 88%. But I'll expand further in the next slides on that. And to finish, I want to comment on the strong net cash position of the company, which is above $50 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 an historical view of the EBITDA on the quarter-per-quarter basis. And as you see, that's 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 2022 and, for example, what you've seen in 2018 and 2019. now to the to the right we have used an explanation of the variance between the 16.6 million of this year and the 1.6 million of last year and i focused 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 a way, or just we focused in line to be at the same time increasing the volume of our cooking ourselves and also maintaining the margin at a more than acceptable level. Then I'd like to comment on how we generate the cash. EBITDA is good, but cash is king. And you see to the left, you know, the transformation from EBITDA to free cash flow. 6.7 of pre-cash flow out of an EBITDA of 16.6. I would comment this performance as fair. It's not where I'd like just to be. And you see the three, four bars that explain the variation of our working cap with a good performance on inventory that are still too high but are decreasing for the quarter. And the AR that are increasing mainly through 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 consummation 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 68 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, $60.5 million, out of which you have $7 million of short-term investment. 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 transforming that into cash. Now let's have a look at the full year. As mentioned before, the sales for the full year amount to $411 million, which is the best number in the last five years. I'm very proud of the second bullet point, which is an increase of our gross profit of 610 basic points from 26.7%, which was fair, to 32.8%, 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 Belan. In terms of EBITDA, you know, the figure speaks by itself. Almost 40 million of EBITDA, which represents $1.8 per share, and it's 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 to report to you that as a result of the good performance of the company financially and the healthy cash position, the board has approved an eligible quarterly dividend of $0.03 per share, which was what we had in place two years ago, so that we would 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 element of perspective for the company. As I mentioned to you, the backlog is still healthy. Both are million. It's book-to-bill ratio below one, but it's not very low. And what is extremely important is the portion of the backlog which is shippable in the next 12 months. And if you go to the right of the slide, you have the stack bars. And the bottom part or the bottom portion of the stack bar are exactly what we can ship in the next 12 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 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 required for a refinery in Egypt, We decided just to highlight here not a single project, but a 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 effort that we have together currently are around HF Acid Bout and Coker 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 customer we want to favor in the future. We believe that the future of BELAN is around our key customers, key accounts, and we put in place 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 Sundance 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 Allain, the CFO in place, will step 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, a little bit more than one year, basically help us modernize our pilot processes and systems and I can tell you that I see 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 you, sorry, to welcome Rishi Sharma 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.

Thank you. I would like to ask you a question. 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 answered or to draw your registration, you can press the 1 or by the 3. Again, you can ask questions for 1-4, so 1-4-2-4, and you can ask your question either in French or in English. And our first question comes from Michael Dume, private investor. Our first question from Michael Dume, private investor. Go right ahead.

Hey, good morning, Bruno and Benoit. Nice quarter. 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 the capex business. Anytime there is an uncertainty on the market, even if, you know, when you see the prices of commodities going up like hell, 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, so large investments, 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 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? We're 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, Benoit will answer because it's very technical, and I want to make sure that exactly it's clear what we put in the MD&M. It seems very clear, but please, Benoit, could you elaborate on that? Yeah, well, in the SBA, there's three components. There's the Claims that we know we will settle. Claims that we know that, well, the chance of settling or a low number is high. And the third one is all the future claims. This year, we took a more conservative approach versus previous year. You see the total expense for the full year is $25 million, plus PESTAs. $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 claim that we didn't receive yet. So that's the current 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. In terms of the balance sheet and the cash flow, nice to see the improvement in the ARs. You still have 180 days in inventory. I mean, 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'll 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 raw material, 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 finish 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 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 it takes us time. 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 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, 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, it's a little bit complex for me just to be very precise on what I will 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. For questions, I don't know how to manage that, but I don't want just people being frustrated by only having one person just discussing with me. So sorry to be rude, but 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. Our next question is from Stephen Dukaxi, Leicester Asset Management. Go right ahead.

Sorry, can you hear me? Yes. I also sent them through the chat. The first question was what are the normalized margins when you back out the revaluation 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 5%. So when you look at our, when you look at our gross margin, it's 38 versus 27 last year. And if you take out the 8.8 million, it would give up about 32, 33%.

Okay, and is there still some Canadian wage subsidy in the latest quarter? No. Okay, zero in the quarter. So when you're referring in your MD&A to less wage subsidies this quarter, they're actually zero both in the cost of goods sold and in the SG&A, correct? Yes. Okay. The other question is, and you sort of touched on it a little bit, but 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 congestion in the port of Shanghai, which is quickly congested. uh and and it it touches at different levels first is yeah in the actual you know supply of goods coming from 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 uh overwhelmed by the workload. And then the third thing 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 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.

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% range? 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, which is I give you two extremes. And basically, so basically, what we expect is that we will maintain on the BU per BU, Uh, basis, the same post margin this year than last year. But then you have the mix that I won't comment on. Okay, sorry, I missed that.

You're trying to maintain the web, sir.

You know, we have five strategic markets. What I'm saying is the strategic market has a target of 25%, let's say, last year. Our target this year is to maintain or to exceed these 25. Because the 35 is the combination of the prior year's margins in each market. That was my point. Sorry if I was not clear. Okay.

And then finally, I appreciate the dividend, but it's very paltry, and to me it doesn't add any value to the shares. 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 probably that the board that should address this question. I'm not sure I'm qualified just 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 shares, which are trading at less than liquidation value, as a prior question pointed out. Okay, thank you.

Thank you very much. Encore une fois, un truc de rappel, si vous aimeriez poser une question, appuyez sur le 1 sur le 4. As a reminder, if you'd like to ask any other questions or comments, you can do so now by passing the 1-4 on your telephone keypad. And notre prochaine question en ligne de Jean-François, investisseur privé. Our next question is from Jean-François, private investor, go ahead. La parole est à vous.

So the question was, can we give a split between the different five business segments?

And the answer is we don't do that. and we have no intention to start doing that for obvious competition reasons. So that's – we don't want our competitors to know. So basically, yeah, you can just have a trace of what we can offer in our different communications, but we won't be more specific.

As an indication, as you know – In the end, by the way – For competition issues, yes, because there is still a difference between the defense sector and the maintenance sector.

Jean-François, it's Benoit who is talking, there are indeed differences. As Bruno said, we do not report them in a specific way. On the other hand, from a geographical point of view, it is reported on page 6 of the NDNA. Sans que ce soit rapporté de façon spécifique, on sait par contre que la France est fortement teintée par le nucléaire. L'Italie, c'est oil and gas upstream, FPSO. Ça donne déjà quand même une indication.

OK. J'ai une deuxième question. Je pense que ça a été déjà posé, mais je la comprenais mal. Parce que dans les provisions pour les problèmes reliés à l'amiante, Dans la provision courante, vous mettez une provision de 4 millions, alors que dans les derniers rapports annuels, il y avait toujours des coûts associés à ça de 10-11 millions. Je voulais savoir pourquoi ça avait été diminué.

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 is $12 million that is, I would say, according to the same method that we used in previous years. And there is an additional $13 million. And this $13 million is related to, as I said, we receive, we have a basket of claims. Et de ce claim-là, historiquement, on provisionnait seulement ceux qu'on était certain de régler. Là, on a extensionné un peu. Par contre, on ne provisionne toujours pas les claims futurs.

Donc, si, mettons, vous avez une poursuite l'année prochaine qui est inscrite, ça n'a pas été mis dans les provisions présentement? Une nouvelle poursuite qui s'inscrirait n'est pas dans les provisions. OK. Parfait. I have one last question. I want to know, for the tax losses, in the sense that you have operational losses in certain jurisdictions, and you never think of making profits to be able to use them. Is that what I understand?

Non, pas tout à fait. C'est-à-dire qu'on a effectivement des pertes qui sont toujours disponibles dans certaines juridictions, bien que le management, on pense qu'éventuellement on va pouvoir utiliser ces pertes-là d'un point de vue purement technique comptable, puis je dirais avec une petite dose de conservatisme, on a décidé d'éradier cette année, simplement.

Qu'est-ce qu'on pourrait savoir dans les juridictions qui sont les plus, c'est que les pertes comptables ont été prises de manière la plus importante?

Non, on ne rapporte pas l'information par juridiction. OK, parfait.

Mais dans le sens, ils sont perdus d'un point de vue comptable, mais si un jour la compagnie fait des profits dans une certaine juridiction, elle va pouvoir les utiliser pour... Okay, perfect.

Thank you very much.

Thank you, Jean-François.

Merci. On a notre question encore une fois de Stephen Takaksi de Leicester Asset Management. We have another follow-up question from Stephen Takaksi from Leicester Asset Management. Go right ahead.

Merci. It's 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 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 will be every quarter, so 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. Right. Okay. Okay. Merci beaucoup. And, you know, 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.

Thank you. Thank you very much. Mr. Carbonaro, we have no further questions on the line. 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. Bye.

Merci beaucoup. C'est la conférence téléphonique d'aujourd'hui We thank you for your participation. We thank you for your participation. We thank you for your participation.