Velan Inc.

[Foreign Language] 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 commending our results for the Q4 and the full year and then giving you some elements on the outlook. We will then open the lines for your questions.

First, to start the usual disclaimer, I let you couple of seconds to review it. It's nothing new, but it's absolutely mandatory.

And 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 that 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 expansion of that is the derecognition of $32.6 million of deferred tax assets.

In terms of backlog, we still have a very high backlog of both $500 million, even if you recall that our book-to-bill ratio is below one, it's only 0.88%. But again I'll explain 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 $50 million and at the same time, as I will explain later, we were able to reimburse a fair amount of outstanding debt. Now, having a look at the detail on the left of the slides, you have an historical view of the EBITDA on a quarter-to-quarter basis and as you see that the third quarter in a row where we can just report a very nice EBITDA and it's -- there is a big contrast between what you see for 2022 and for example, what you seen in 2018 and 2019.

Now, to the right, we have -- give you an explanation of the guidance between the $16.6 million of this year and the $1.6 million of last year and I'll focus my attention on the two first bars. Basically, at the same time, we increased immensely the volume and immensely 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 revoke a thin line to be at the same time increasing the volume of bookings at our sales and also maintaining the margin at more than acceptable level.

Then, I like to comment on how we generate the cash, EBITDA is good, the cash is king and you see to the left you know the transformation from EBITDA to free cash flow $6.7 million of free cash out of EBITDA $16.6 million, I would on this performance as fair, it's not where I 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 still are in -- that are still too high, but are decreasing for the quarter.

The AR, there are increasing, mainly through timing, impact of our sales and the APs that are also in decreasing, which is not what we expected. But basically, rest assured that we are actually 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 have. 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 with the cash position, which is here $60.5 million out of which you have $7 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 transforming that into cash.

Now, let's have a look at the full year. As mentioned before, the sales for the full year amounted to $411 million, which is 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 610 basic points from 26.7%, which was fair to -- 2.8, 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 Velan. In terms of EBITDA, the figure speaks by itself, almost $40 million of EBITDA, which represent $1.8 per share, and it's more than double the results we publish for last year.

In terms of loss, I already explained why we have a net loss, which is linked to exceptional items. And think that it's important for to report to you that as a result of good performance of the company financially, and the healthy cash position, the Board has approved knowledgeable quarterly dividends of $0.03 per share, which was what we had in place two years ago.

So, that is you will reinstate something which was going and an IP 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 to have LC above $500 million is book-to-bill ratio below one, but it's not very, very low. And what is extremely important is the portion of the data which is shippable in the next 12 months.

And if you go to the right of the slide, you have the stacked bars and the bottom part of the bottom portion of the target 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 or 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 probably most of you know if you're being part of the above 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 and currently around HFS bulk and Coker product lines and basically what is good, 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.

We believe that the future of Velan 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 go with them. So, basically, we have a challenge future and Sunbelt is obviously the one of those loyal customers that we will 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 this Benoit Alain, the CFO in place, we stepped down in a couple of days as we have announced the market in December.

And I want to thank him for what he did during his tenure that’s little bit more than one year, basically help us modernize our current processes and systems. And I can tell you that I see a difference now compared to one year ago.

So, I like just to wish him well for the next step in his career and I'd like you to join to welcome -- I actually started to welcome Rishi Sharma. He is an excellent complement to the team as you may have seen.

He has an amazing financial [ph] 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.

Hey, good morning Bruno and Benoit. 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 waged is Ukraine. And when there is uncertainty, we're in the CapEx business.

And if anytime there is an uncertainty on the market -- even if when you see the prices of commodity going up, like oil, the price of energy going very, very high and then decreasing and people talking about recession. It's extremely difficult for decision-maker to make decision around new project.

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 in some 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 that year end will be soft and we were expecting some rebound on the market in Q1. To be honest, I think Ukraine has -- 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 suggest is 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&A, seems very clear, but please Benoit could you elaborate on that?

Yes, well, there's -- in the asbestos, there's three components, there's the claims that we know we will settle, claims that we know that -- well, the chances of settling are or a low number is high. And the third one is all the future claim.

This year, we took a more conservative approach versus previous series, 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, still don't make any provision for future claim that we didn't receive yet. So that's, that's the current situation.

But again, this is definitely a lot more conservative than previously and those number, those extra expenses are part of our EBITDA this year.

Understood. So, the expense is 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 ARRs, you still have 180 days in inventory.

I mean, that's your inventory position is actually larger than your market cap. Anyway, you can give us a sense for 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?

I explained, 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 there are difficulties to ship and busy we still are impacted by the impact of COVID-19 difficulty to get our goods out of China and India, a lot of our customer 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 raw material, what finished parts, which what is wheat and what is finished goods, I can tell you where spent, we are spending a lot of time on that. Basically, what we hope is that when we have finished with the high repercussion of the COVID-19 and the war in Ukraine, basically, we will be in a position to reduce immensely.

And I think that it's a sizably. If I made it 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 and lead it will be led by Rishi and busy takes us time.

So, don't expect miracle in the next first quarter. But this is definitely a long-term objective for the company.

And to give you an example on the [indiscernible] fixture of our companies, not only in North America, but also outside we introduced the cash generation and working cap as one of the key elements we based our priority on.

That's helpful. Thanks.

And I guess just an extension to that, I mean nice to see the dividend reinstated. It looks like profitability has moved thoroughly in the right direction, cash flows are getting better, the balance sheet is I'd say more than sufficiently capitalized, how should we think about additional capital deployment going forward?

What your thoughts are in terms of return to capital versus M&A?

It's a very broad, it's a very broad question. That's -- it's a bit complex for me just to do 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 only be among the people that can set the tone in the industry.

How -- when it's completely unclear, but basically, the good news is now we can have our destiny in our hands and it's much more convenient than was probably a couple of years ago.

Yes, [indiscernible] done the year--

We have a lot of other people on the line [ph] 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.

Sorry, to be rude, but I see that -- I see questions on the Q&A. So, how do we proceed?

I don't know. Should we--?

What I suggest, Tommy, if we can move on and Michael left you, for other question, maybe go back on the queue to let the chance for other people please.

Yes, sorry. Can you hear me?

Yes.

So, I also sent them through the chat. So, the first question was, what are the normalize the 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 the impact of 5%. So, 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 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, there are actually zero both in the cost of goods sold and in SG&A, correct?

Yes.

Okay. The other question is, -- yes 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?

Yes, we still have the congestion in the Port of Shanghai, which is completely congested. And it touches at different levels, firstly, is yes -- in the actual supply of goods coming from China, but also, now there are more competition in supply chain that is moving to India, the 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 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 yes, we are continuing the supply chain and the price increases and decreases the commodities as an impact on the performance of the company, and still has.

Right. And so are you still -- like what's the margin objective?

Are you still trying to maintain margins in the -- gross margins in the 30% to 35% range, is that a fair assessment?

Here, we reported last time we discussed about our different markets, and basically, interestingly, outside the U.S. have different targets and depending on the mix, it could change and because basically, you don't have the same for MRO or SSD which is give you two extremes and mitigate.

So basically, what we expect is that we will maintain for on the BU-per-BU basis, the same gross margin this year than last year, but then you have to mix effects, that they won't comment on.

Okay, sorry, I missed that. You're trying to maintain the what, sorry?

We were up five strategic markets, but I'm saying if it's really good that I did targets of 25% let's say last year, our target this year is to maintain or to exceed these 25% because the 25% is [indiscernible] higher margins

Prior year's margin in each market.

[indiscernible] that was that was my point. Sorry, if I was up here.

Okay, and then finally 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 -- address this question I'm not sure I'm qualified to do that. The good news is that the Board approved the dividends and I think it goes in the right direction.

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 that pointed out.

Okay. Thank you.

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So, the question was do we -- can we give a split into different 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 -- and we don't want our competitors to know so basically yes, you can just have a trace of what we can offer different communications that we won't be more specific.

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Merci. Just a follow-up question to the previous gentleman's question on the asbestos litigation.

So, if I understand correctly of the $25 million, you said $12 million 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, if that claim -- 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 claim that we were sure to settle, now we'll take a provision for all the claims that we have.

And that'll be everything --

Everything that will--

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. Right.

Okay. Now super cool.

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, well done on that.

Thanks.

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.