Velan Inc.

Greetings and welcome to the VELAN Inc. Q1 Results Conference Call. Bonjour et bienvenue à la conférence téléphonique des résultats du premier trimestre VELAN Inc. During the presentation, all participants will be in a listen-only mode. Later we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. Pendant la présentation, tous les participants seront en mode d'écoute seulement. Une période de questions suivra la présentation. Si vous souhaitez poser une question, appuyez sur le 1 suivi du 4 sur votre téléphone. If at any time during the conference you need to reach the operator, please press star zero. Si lors de la conférence vous avez besoin de la téléphoniste, s'il vous plaît appuyez sur l'étoile suivi du 0. As a reminder, this conference is being recorded, Friday July 8th, 2022. Nous vous rappelons que la conférence 'aujourd'hui est enregistrée vendredi le 8 juillet 2022. I would now like to turn the conference over to Bruno Carbonaro, Chief Executive Officer and President. The floor is yours. Please go ahead.

Hello, Bruno Carbonaro speaking.

Before

starting the presentation, I just present the usual disclaimer. We are just presenting our results for the first quarter of the year fiscal year 2023, ending on May 23rd, 2022. There is a usual comment on the non-RFRS financial measures, and we have also the usual comment on the forward-looking information 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 question 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. There will be a lot of very familiar names. The two changes are that we have Bill Sheffield and Robert Reich that stepped down, and in place we have Peter Villan, who comes back to our board of directors. Now the highlights of the Q1. I think you are now used to the 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's translated into any data of minus 2.9 million, which is a little bit lower than last year. And the main explanation is an increase of the admonition costs, especially due to the outgoing freight costs. The net loss is in sync with that, minus 7.4. But the good news, and it's extremely important, that we continue to have a good visibility on our activity with the backlog, which remains at a high level with 5.6 million, and obviously a -to-bill ratio which is recoverable 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 will 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 the visibility on the size of the backlog, so you can just see that it remains at a high level. And we also communicate 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. 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 their sales in euros, and the decrease of the value of the euro during the first quarter had an impact on the size of our backlog of almost 30 million. I'll just now hand over to Rishi just to help us better understand the split of our sales and of our EBITDA and our cash.

Thank you, Bruno. Thank you. Good morning, everyone. So sales, as mentioned, comparable to the prior year Q1 at about 75 million or .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's a 6.5 versus an 8.5. I think the third-party sales improvement there has given us a pick-up. When we look at France, a 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 whip in our finished goods. And final negotiations in process with certain customers. If you look at EBITDA, Q1 generally and historically, Q1 is soft. We do have a bit of a higher reported EBITDA loss here, which is 13 cents of a loss per share. The unfavorable movement for the quarter is primarily attributable to an increase in mint costs, selling costs, as Bruno had mentioned. Some pressure on supply chain logistics and outbound freight costs 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 .1% normalized last year to .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 is coming from the EBITDA loss of minus 2.9. 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, 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 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, a slight burn on the free cash flow, our liquidity in that cash remains very strong. So at the end of Q4, we were in a 53.5 million net positive cash position. This positive cash position drops to 47.7. Apologies. The driver here, really the free cash flow. We have a 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.

Thanks, Richie. 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. It's my top priority. And we want to ensure that we can really meet our deadline for shipments and the combination of manufacturing on time, but also just fixing all these logistics issues inbound and outbound. So that's really a good focus for a good portion of my time will be focused on that. The second thing is we truly believe that we have in front of us a strong Q2 and a strong end of the year. So we have the backlog. If we're disciplining execution, we don't see why. We don't just have the same type of years than last year. However, I think as everybody knows, the economy is moving very fast. A lot of volatility in terms of completion of raw material, in terms of recession, in terms of geopolitical uncertainty 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. We are on top of that and we want to continue to really be extremely disciplined the way we allocate the capital and we can get our money back from our ERs. So that was my comment for the rest of the year and now both Rishi and me are at your disposal to answer any question you may have.

Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone. If you would like to ask a question, please press the 1 followed by the 4 on your telephone. One moment please. One moment please. As a reminder to register a question, please press the 1 followed by the 4. As a reminder, if you would like to ask a question, please press the 1 followed by the 4. The first question comes from Stephen of Lester Asset Management. Please go ahead.

Hi. Can 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 the V20 and quantify what the additional freight and shipping costs were and also what charges were booked on the usual asbestos litigation as well.

Hi, Stephen. It's Rishi. So on your first point, absolutely, the focus was and is on the admin cost. On the outbound freight, if I can comment, there's operational mitigation there. So with the delays in 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 made 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.

Which is, can you give us the number?

Prior

year was

four and a half million, I believe. 4.3 million.

In the quarter? In the quarter, yes. Right, yeah, that's a big number, obviously. It cuts into 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 at year end, but is there anything going forward that the company is working on to try and mitigate these costs?

Perot speaking, as we already said, we monitor the situation extremely closely and we just adapt our strategy to the latest news we have.

All right. All right, that's it for me. Thank you. Thank you, Stephen.

As a reminder, via the phone lines, you may press the one or two to register a question. As a reminder, it's the one followed by four to ask a question. I shall no further questions at this time. I'll turn the call back over to our speakers for any closing remarks.

Nothing to add. I think thanks for your attendance and we are still happy to answer any questions in private if you have.

Thank you. This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Merci et bonne journée.