Velan, Inc. (TSE: VLN) Q3 2021 earnings call dated Jan. 13, 2022
Corporate Participants:
Bruno Carbonaro — Chief Executive Officer and President
Presentation:
Operator: [Foreign Speech] Greetings, and welcome to the Velan Inc. Q3 Financial Results Conference Call.
[Foreign Speech] [Operator Instructions]
As a reminder, this conference is being recorded today Thursday, January 13, 2022.
[Foreign Speech]
I would now like to turn the call over to Bruno Carbonaro, Chief Executive Officer and President. Please go ahead.
Bruno Carbonaro — Chief Executive Officer and President
Good morning. Bruno Carbonaro speaking, the CEO of the Velan since December 1, 2021, when I succeeded Yves Leduc. We have in this conference, with Benoit Alain, the CFO of Velan.
Just to give you a little bit of my background, I joined the company in November 2019 in the capacity of President, under Yves, and as you may have noticed my accent I’m French. We have slightly changed the format of this call and we’ll use the support of a brief presentation to present our results for Q3, and this presentation will be available in French and in English on our website.
Let’s move on to the first slide, which shows our just principal markets and you see that we are active in different markets, the Navy business, especially in the U.S., the nuclear business, especially in Europe but also in Asia and in North America. Securaseal application with those of ball valves, Torqseal applications in the refineries and in the mining business. The oil and gas, which is both upstream, where we have put in the oil and gas projects, where we have refineries and petrochemical and the MRO and aftermarket business, which is mainly based in North America, but there’s also some connection in Asia and Europe.
Let’s move on to the next slide, where I want just to have the opportunity to present our new Board of Directors. We have nearly 10 persons on the Board and we have three new members that joined us in 2021. Suzanne Blanchet, Robert Raich, and Edward Kernaghan, and Suzanne is the new Chair of the Audit Committee of the company. So it’s extremely happy that you see that it’s a blend of member of the family and Senior Executive with a lot of experience as Directors.
Now let’s move on to the results and highlights of the quarter, and as you see we try just to show the results more than speaking to them is basically you see that the sales for Q3 reached CAD110 million, which is a second quarter in a row of above CAD100 million and basically it’s one among the best quarter in the past five years. On the EBITDA front, we report an EBITDA of CAD13.3 million, which is comparable in amount to last year, but you will see in the subsequent slide that it’s completely reach in a different manner, which is — which speaks to our results in terms of proportional results.
The net income is positive at CAD4.5 million and that’s the second time in a row that we have a profitable quarter. Just to have a look at the future, it’s extremely important that we have a look at our backlog, with a backlog of CAD543 million, we still have a very high backlog and the book-to-bill ratio from the beginning of the year. So from the first year — from the first day of the year till the end of the third quarter is one, and basically, the decrease of the backlog, which is a slight decrease by around CAD20 million is mainly due to the appreciation of the dollar versus the euro and extremely strong billings in the two last quarters.
In terms of cash, as you see, there is a slight decrease of our net cash but basically we use the cash generated by our operations to pay down our revolving credit facility by CAD11.9 million. Can we move to the next slide, please? Okay. I want to explain in detail our EBITDA. And as you see to the left of the slide, it’s one of the best EBITDA in the recent time. It’s round equivalent to the EBITDA of the third quarter last year, but last year if you remember, most of the EBITDA came from a restructuring and transformation income. Basically we sold out the former plant to in Montreal and the proceeds of the sale were incorporated somehow in EBITDA.
So if you go to the right of the slide, now we readjust the EBITDA of last year from CAD13.8 million to CAD5.7 million, which is really comparable to the CAD13.3 million we report this year. Basically, if we want now to break up the different variances, the first is the volume, the mere volume of sales with the CAD13.5 million increase, and a good mix, the margin mix has improved also.
And then there is a fixed, for instance — benefit of CAD1.8 million, that’s the positive side of it. On the negative side of it, you have an increase of the admin cost including the sales commission that were higher because the volumes of the sale was also higher and then a decrease of the federal subsidies is huge, and you have all the details in the press release between the use in the admin costs and use in our direct labor costs and then the other is CAD0.6 million.
So basically, a strong increase from CAD5.7 million adjusted EBITDA to CAD13.3 million. So that’s a very strong third quarter in terms of EBITDA. If we move on to the next slide, then you see on the slide, how we used the cash generated by the EBITDA. So basically, if we start just to the right of the slide, I think CAD13.3 million of EBITDA translated in the free cash flow of CAD6.2 million, that’s the ratio about 45%, which is a fair ratio that is better, but it’s not a bad ratio and that you see that the main focus we have is on working cap and we managed to reduce our account receivables by CAD11.7 million and our inventories by 4.7% — CAD4.7 million, sorry. Basically, it shows you that we have a strong focus and strong discipline in our working cap, and we will continue to do so in the future quarters.
On the negative side, we have a reduction of account payables links to the purchasing cycles, we have a reduction of the customer deposits because we’ve — it’s really a timing issue for projects and the rest is less important. So basically, we generated CAD6.2 million of free cash flow out of an EBITDA of CAD13.3 million and now you see how we use that basically on the left, where you see that, basically, we generate CAD6.2 million of free cash flow.
We had also a gain on disposal of properties and plants, mainly due to operations in Korea and then using that we decreased our debt by repaying our revolving facility by CAD11.9 million. And then the rest you can see, so a strong discipline in the cash management on the top of having an EBITDA, which is in nice EBITDA for the quarter.
Let’s move on to the next slide. Yeah, I want to focus on the backlog. Basically, that’s the only metric we comment with the investors when it pertains to future operation. It remains important in the project business to have a sense of your backlog, total backlog, and more importantly, the share of your backlog that you can ship into the next 12 months. So that’s something that we report generally.
And here you see that the total backlog is a slight decrease at CAD543 million and CAD350 million is shippable in the next 12 months, and basically it’s stable. It has been stable in the last 18 months, and basically that book-to-bill ratio of CAD1 million.
If I’m completely honest, the performance in terms of bookings of the Q3 was fair but not extremely good and we see some dynamics on the market in the various regions, indeed, North America, India and China that could lead to increase by backlog in bookings in the next — in the next quarters.
Let’s move on to the next slide, I’d like to highlight some of the markets where we are pretty active and most probably some of you know if you follow us for a long time that the Coker — the Coker business, which is reported in the severe service segment is one of our sweet spot. And I’d like to give you a couple of details around the typical project that we gain and that’s the project that we got at the end of the quarter, most probably it will be reported in Q4 technically.
But it’s a CAD4.2 million project for a refinery in Egypt, and basically it’s through a European EPC that’s Technip and basically, in terms of number of valves, it’s extremely important, because it shows you exactly the type of projects we are pursuing. It’s around 70 to 75 different valves but in four different categories, you have gate valves and ball valves and you have switch valves that are very specific and basically by just assembling a bundle of technologies we were able just to offer and much offer it to the EPC at a reasonable price and that allowed us to get this business.
And basically, on this type of business for CAD2 million, basically, we will have people working on it, not only in North America, especially the engineering office, but also in Europe because most of the slides, most of the valves will be manufactured either in Portugal or in Italy, because basically, it was extremely important for the customer to have them manufactured in Italy because they had access to a financing which was of Italian origin if we were just able to show that we were manufacturing in Italy.
So that’s the type of value that we as an international group with operations in different geographies can assemble for the benefit of our customers. And I suspect that we can go to the next slide just to show our face, Bruno Carbonaro, that’s me, and Benoit with me and we will be more than happy to answer any question you may have.
Let’s open the floor to any questions.
Questions and Answers:
Operator
[Foreign Speech] [Operator Instructions]
Mr. Carbonaro, we seem to have no questions queued up on the phone at this time.
Bruno Carbonaro — Chief Executive Officer and President
Okay. Let’s wait an additional two or three minutes and then we can adjourn, I suspect.
Operator
Very good. [Foreign Speech] [Operator Instructions] And Mr. Carbonaro, we have no questions queued up on the phones.
Bruno Carbonaro — Chief Executive Officer and President
Okay. So I suspect that’s it’s time for me to conclude. Thanks a lot for listening to Velan and I’m more than happy just to answer any of the questions you may have after the conference or you can direct also your questions to Benoit, where you see his email address. So don’t hesitate to call us if you have any private question you may want to have. Thanks a lot.
Operator
[Foreign Speech] [Operator Closing Remarks]