Velan Inc. (VLN) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the Velan Second Quarter Financial Results Conference Call. [Operator Instructions] Please turn your attention to disclaimer from Velan's related Investor Relations presentation, which is available on its website in the Investor Relations section. The first paragraph mentions that the presentation provides an analysis of Velan's consolidated results for the second quarter ended August 31, 2026, which the Board of Directors of the company reviewed yesterday, October 7, 2026. The second paragraph refers to financial measures are defined under International Financial Reporting Standards as well as supplementary financial measures, which are defined and reconciled at the end of the presentation. The last paragraph addresses forward-looking information, which is subject to risks and uncertainties that is not guaranteed to occur. Forward-looking statements contained in this presentation are expressly qualified by this cautionary statement. Finally, unless indicated otherwise, all amounts in United States dollars. This call is being recorded on Thursday, October 8, 2026. I now turn the conference over to Rishi Sharma, President and Chief Executive Officer. Please go ahead, sir.

Good morning, I'm here with Imran Gibbons, Chief Financial Officer of Velan. Thank you for joining us for our conference call. I invite you to turn to Slide 3 of the presentation. The second quarter was a transition quarter, and the foundation of the business is being rebuilt. Looking at the headline numbers across the top of the slide, Sales were $57.5 million, down 14.9% from last year. Bookings were $47.9 million, reflecting the timing of large awards. Our backlog stood at $262.5 million, with 76.2% of it expected to be delivered within the next 12 months. Adjusted earnings before interest, taxes, depreciation and amortization were negative $0.7 million, excluding transaction costs. We ended the quarter with $28.2 million in cash and cash equivalents as well as our new $80 million facility. Imran will take you through the detail. The three panels below summarize how we see the business. The first is where we are. We are trailing the prior year. The softness in our results was driven by execution and the timing of shipments rather than by demand by volatility relating to tariffs, trade disputes and geopolitical uncertainty in the Middle East and by certain operational and customer constraints. The quarter also reflects significant onetime transaction costs rather than a change in the underlying business. The second is what is solid: demand and liquidity. The demand environment and our core nuclear defense and energy markets remain solid, although the timing of bookings can shift from quarter-to-quarter. With our available liquidity, we are well positioned to finance current and future working capital requirements. The third is where we are going, profitable growth. We have focused initiatives underway and we are building a leaner cost base and a substantial pipeline of large core market opportunities remain in play. Please turn to Slide 4. Starting on the left of the slide, the near-term picture. The lower bookings reflect the timing of large awards rather than lost demand. Bookings were softer in the second quarter, particularly in the nuclear power and process end markets in North America and at our China operations while maintenance, repair and overall activity held up well. We expect near-term order activity to remain mixed across regions. However, we have a large number of opportunities across nuclear, defense and projects in the pipeline at various stages of qualification, and we expect a portion of them to convert in the near term. On the right of the slide are six pillars of our focus initiatives for profitable growth. Cost discipline is about rightsizing the cost base and embedding spend discipline across the organization. Procurement and value engineering is about optimizing our supplier base and strengthening sourcing across the group. Talent and organization is about building the capability and accountability to execute including our new organizational structure with senior leadership appointments now in place and our investment in engineering and quality, the functions that underpin our nuclear and defense franchise and our on-time delivery performance. Manufacturing footprint is about making the best use of our global footprint and modernizing our facilities. Working capital and assets is about releasing cash from inventory, receivables and underutilized aspects. And finally, growth acceleration is about accelerating profitable growth in our core markets in the aftermarket and across new opportunities. Subsequent to quarter-end, we implemented a restructuring plan, mainly affecting our corporate activities, which includes workforce reductions. These actions align the business with current volumes consistent with our cost discipline pillar. Imran will cover the financial impact. Turning to Slide 5. I would like to spend the rest of my time on our key markets: nuclear, defense, power and maintenance and overhaul and repair because this is where we see the opportunities that will drive our growth. Let me start with nuclear. Although North American nuclear bookings this quarter trailed prior year, the underlying momentum in this market continues to build. Demand for the reliable, low-carbon energy is driving investment in reactor refurbishments, life extension programs, small modular reactors and new builds. In Canada, nuclear energy strategy supports both refurbishment and new build opportunities. With more than half a century of nuclear expertise, a global installed base and leadership across reactor technologies we are well positioned to benefit from these opportunities. Many of the nuclear opportunities in our pipeline are tied to funded projects that are advancing through engineering and procurement stages, and management expects a meaningful portion to convert into bookings. In Defense, naval modernization spending continues to rise. Given our leading position in nuclear propulsion valves, we are actively pursuing several opportunities that we believe could translate into orders and execution activity over the next 2 years. Naval modernization and fleet sustainment are driving multiyear demand and the long-term qualification cycles in this market create high barriers to entry. In Power, we serve a large install base across conventional and combined cycle generation and aftermarket and life extension work underpins steady demand. Geopolitical uncertainty has slowed project bidding but deferred maintenance activity in North America and longer-term infrastructure projects in the Middle East continue to create attractive opportunities. Given our strong market position and our presence in Saudi Arabia, we are well positioned to capture this demand. Finally, maintenance, repair and overhaul. Our aftermarket business is resilient through the cycle and held up well through the quarter. A large global installed base, together with spares and field service gives us shorter cycle, faster converting demand that helps fund operations while larger projects mature. Please turn to Slide 6, which summarizes the quarter. On the headwind side, shipments were delayed by tariff and geopolitical tensions and by certain operational and customer constraints and bookings were weaker in North American nuclear power and process in China. On the offset side, maintenance repair and overhaul activity stayed strong and our backlog of $262.5 million remains solid, with 76.2% deliverable within 12 months. We also ended the quarter with $28.2 million in cash and cash equivalents as well as a new credit facility that, as noted earlier, positions us well for our profit and growth pillars. I will return with closing remarks after Imran's financial review. Imran, over to you.

Thank you, Rishi, and good morning, everyone. Please turn to Slide 7. Our order backlog stood at $262.5 million at the end of the second quarter, down from $285.8 million a year ago. The decline was broad-based with the largest reductions at our Italian operations as shipments converted backlog into sales and bookings were softer, partially offset by growth at our North American and Indian operations. Of the total, $201.1 million or 76.2% is expected to be delivered within the next 12 months, with the remaining $62.4 million scheduled for the following 12 months. Bookings totaled $47.9 million compared to $65.2 million last year. reflecting the market conditions Rishi described. maintenance, repair and overall activity represented a significant share of the quarter's bookings. Turning to Slide 8. I Second quarter sales totaled $57.5 million, a decrease of $10.1 million or 14.9% compared to $67.6 million last year. The timing and complexity of certain production orders shifted shipments into later periods. Tariffs and geopolitical tensions, together with certain operational and customer constraints pushed shipments out of the quarter. The decrease primarily reflects lower shipment volumes at our North American and Chinese operations, resulting from softer bookings in recent periods, delays in certain large project deliveries and continued production and logistic challenges, including delays linked to the conflict in the Middle East. These factors were partially offset by higher shipments of large offshore and floating production project orders, mainly serving customers in the Middle East and Asia. Currency movements had a negative $1 million effect on sales. By customer geographic location, North America remained our principal market at 54.9% of sales, although North American sales were down approximately $5.9 million from last year. Asia Pacific was our second largest region at 38.2% of sales compared to 25.9% last year, lifted by those large offshore and floating production orders, while Europe represented 4.2% of sales. Turning to Slide 9. Gross profit was $12.6 million or 21.9% of sales versus $15.7 million or 23.2% of sales in the prior year. The decrease primarily reflects the impact of lower sales volume on the absorption of fixed production overhead costs, together with the net impact of tariffs on cross-border shipments and a less favorable project mix at certain facilities. These factors were partially offset by a favorable reversal of aged inventory provisions in our Asian operations. Administration costs totaled $16.9 million or 29.4% of sales compared to $15.4 million or 22.7% of sales a year ago. The increase as a percentage of sales mainly reflects the lower sales base. We are aligning costs with current volumes to protect second half margins. Transaction-based expenses were $14.9 million and consisted entirely of costs associated with the closing of the sale of Velan Holdings controlling interest. Other income was $4.3 million, mostly due to the reversal of a nonrecurring provision of $2.9 million. Subsequent to the end of the quarter, we implemented a restructuring plan Rishi described. As it was implemented after reporting date, no provision was recorded in the second quarter. We currently estimate the associated costs at approximately $2 million to $3 million, which will be recognized in the third quarter. Adjusted earnings before interest, taxes, depreciation and amortization, which excludes transaction-related costs and the reversal of the nonrecurring provision was negative $0.7 million compared to positive $3.4 million last year. The decrease reflects lower sales and gross profit. The net loss was $15.1 million or $0.70 per share compared to a net loss of $1.7 million or $0.08 per share last year. The $14.9 million of transaction-related costs drove the difference and they are onetime in nature rather than a change in the underlying business. Excluding those costs, the adjusted net loss was $6.2 million or $0.29 per share compared to an adjusted net loss of $1.2 million or $0.05 per share last year. Turning to cash flows and financial positions on Slide 10. Cash used by operating activities was $14.9 million compared to $17.1 million last year, an improvement of $2.2 million. We concluded the quarter with cash and cash equivalents of $28.2 million as at August 31, 2026. In connection with the closing of the transaction, we secured a new 5-year $80 million revolving credit facility maturing in June 2031. Proceeds were used to repay existing North American debt, including our Canadian secured bank loan, which was fully repaid during the quarter and to fund the transaction-related costs I mentioned. As at August 31, we had drawn $39.4 million on facility, which is reported as bank indebtedness, and long-term debt stood at $5.1 million, of which $3.2 million is the current provision. Net debt being $44.9 million of debt, which is bank indebtedness plus long-term debt, less $28.2 million of cash and cash equivalents was $16.7 million. We ended the quarter with liquidity of $95.8 million, comprised of our available credit, cash on hand and short-term investments. Total assets stood at $320.1 million. Total liabilities were $166.8 million, and total equity was $153.3 million as of August 31, 2026. In the quarter, negative noncash working capital movements were mainly due to a decrease in the income tax recoverable and an increase in deposits and prepaid expenses. Finally, after considering the company's current priorities, including the implementation of the restructuring plan and the preservation of liquidity, the Board has determined that the company will not pay a dividend for the remainder of fiscal 2027. The Board will reevaluate the company's dividend policy on an annual basis. I now turn the call back to Rishi for his closing remarks.

Thank you, Imran. Turning to my closing remarks on Slide 11. We believe our long-term fundamentals remain favorable. Our core markets are attractive, and we continue to see positive momentum in nuclear. Our focus for the second half is on growing bookings and optimizing our cost structure. Our focused initiatives for profitable growth continue. We are building a more efficient, better organized and more capable Velan so that we are positioned to capture future growth as these opportunities convert. We are confident in our long-term outlook supported by our $262.5 million backlog and a pipeline of larger opportunities in our core end markets. While near-term market conditions remain dynamic, we are confident in our ability to build a stronger, more competitive and faster growing Velan. Thank you for your continued support. Operator, we are now ready to take questions.

[Operator Instructions] There are no questions from the phone line. I will turn the call back to Mr. Sharma for some closing remarks.

Thank you for joining us today. We look forward to sharing our third quarter results with you in January. I wish you all a wonderful fall. Have a great day, and thank you.

This concludes today's conference call. A replay will be available on October 15, 2026. Details are in today's press release. Thank you for participating, and you may now disconnect.