Mr. Bruno Carbonaro reports

VELAN INC. REPORTS ITS SECOND QUARTER 2023/24 FINANCIAL RESULTS

Velan Inc. has released its financial results for its second quarter ended Aug. 31, 2023.

Highlights:

• Order backlog (2) remains strong at $485.7-million, an increase of $21.3-million or 4.6 per cent since the beginning of the year. The increase in backlog (2) is primarily attributable to changes in the profile of scheduled backlog (2) shipment dates. The portion of the current backlog (2) deliverable in the next 12 months is $339.4-million.
• Net new orders (bookings) (2) were $71.5-million for the quarter, a decrease of $2.0-million or 2.7 per cent compared with last year. The decrease in bookings (2) is primarily attributable to a reduction in MRO distributor orders, as well as lower process and mining orders, partially offset by a pickup in oil and gas orders compared with last year.
• Sales for the quarter amounted to $80.3-million, an improvement of $12.7-million or 18.7 per cent compared with the first quarter of the current fiscal year, a decrease of $4.7-million or 5.6 per cent compared with the second quarter of the previous fiscal year. The decrease in sales for the quarter compared with the prior year is primarily attributable to delays on certain shipments caused by customer readiness issues and a shortage of deliverable orders in the company's Italian operations.
• Gross profit for the quarter amounted to $23.4-million or 29.1 per cent compared with $23.5-million or 27.6 per cent last year. Gross profit improved by $8.3-million or 690 basis points compared with the first quarter of the current fiscal year. Gross profit percentage for the quarter was a result of improved product mix, offsetting the lower sales volume and unfavourable unrealized foreign exchange translations compared with last year.
• Net loss (1) was $2.1-million and EBITDA (2) (earnings before interest, taxes, depreciation and amortization) was $3.0-million for the quarter, compared with a net loss (1) of $3.7-million and EBITDA (2) of $1.4-million last year. The increase in EBITDA (2) is primarily attributable to a $2.1-million decrease in administration costs.
• The company's net cash amounted to $39.4-million at the end of the quarter, a decrease of $19.3-million compared with the $58.6-million net cash balance at the beginning of the quarter. The decrease in net cash for the quarter is primarily related to temporary unfavourable movements in working capital, notably in accounts receivable, inventories and accounts payable, and accrued liabilities, as the company prepares for its ramp-up in Q3 and Q4 of the current year. The overall available liquidity remains strong, with $122.1-million of available cash on hand and facilities.
• The company announced earlier today that it has been verbally informed that the French Ministry of Economy is refusing to grant its approval in connection with the change of control of Segault S.A.S. and Velan S.A.S. as part of the overall sale of Velan to Flowserve. As a result, Flowserve informed the company that it intends to terminate the arrangement agreement on Oct. 7, 2023.

Bruno Carbonaro, chief executive officer and president of Velan, said: "Our second quarter was an improvement in terms of results when compared to our second quarter of last year, as we partly recovered from some of the delays experienced at the start of the year. We are now focused on the ramp-up for the second half of the year. We continue to manage our business prudently with specific focus around executing on our backlog while working on a pipeline of opportunities. We will ensure to benefit from the working capital investments we made in the first half of the fiscal year by working diligently on increasing our collections and reducing our inventories on hand during the latter part of the year. Our North American commercial operations are tapping into new and emerging markets while we also continue to see growth in the nuclear business activities in France. Finally, the board, the Velan family and Flowserve are obviously disappointed with the outcome and the decision of the French regulators. The board recognizes, appreciates and wants to thank the executives, the management team, the integration team and all employees at Velan, and outside stakeholders, who have done everything possible and who worked tirelessly to support the transaction and make it happen. The board and executive leadership are very confident in our strong future, and we will resume operations as an independent business, free of the covenants and other restrictions of the arrangement agreement."

Second quarter fiscal 2024 (Unless otherwise noted, all amounts are in U.S. dollars and all comparisons are with the second quarter of fiscal 2023.):

• Sales amounted to $80.3-million for the quarter, decreasing by $4.7-million or 5.6 per cent compared with the same quarter last year. The decrease in sales for the quarter is primarily attributable to lower shipments of large orders by the company's Italian operations due to a reduction of these orders recorded in the previous fiscal year. The decrease in sales for the quarter was also caused by delays on certain shipments caused by customer readiness issues. Otherwise, the decrease was partially offset by the positive impact of the strengthening of the euro average rate against the U.S. dollar on sales that amounted to $2.1-million for the quarter compared with last fiscal year. Finally, sales for the quarter were also positively impacted by favourable revaluations of the company's provision for performance guarantees and volume rebate accrual.
• Bookings (2) for the quarter amounted to $71.5-million, a decrease of $2.0-million or 2.7 per cent compared with the second quarter of last year. The decrease for the quarter is primarily attributable to lower orders recorded by the company's North American operations. The decrease in North American bookings (2) for the quarter is partly attributable to a reduction in MRO distributor orders, due in part to higher restocking orders in the previous year but also a slowdown currently observed in some covered markets. Additionally, the reduction in North American bookings (2) for the quarter was also due to lower process and mining orders compared with last year. The decrease in bookings (2) for the quarter was partially offset by higher oil and gas bookings (2) recorded in the company's Italian operations. Finally, the decrease in bookings (2) was also partially compensated by the strengthening of the euro average rate against the U.S. dollar on bookings (2) for the company's European operations, which resulted in a favourable impact of $2.3-million in the second quarter compared with the prior year.
• Gross profit for the quarter amounted to $23.4-million, a decrease of $100,000 or 0.4 per cent compared with the second quarter of last year. The gross profit percentage for the quarter of 29.1 per cent was an increase of 150 basis points compared with the second quarter last year. The slight decrease in gross profit for the quarter is primarily due to the lower sales volume, which impacted the absorption of fixed production overhead costs, as well as unfavourable unrealized foreign exchange translations related to the fluctuation of the U.S. dollar against the euro and the Canadian dollar when compared with similar movements from the previous year. This decrease in gross profit for the quarter was offset by an improved product mix, as well as favourable revaluations of the company's provision for performance guarantees and volume rebate accrual.
• Administration costs for the quarter amounted to $22.6-million, a decrease of $2.1-million or 8.5 per cent. The decrease in administration costs for the quarter is primarily attributable to the recording in the last quarter of the previous fiscal year of an asbestos provision for potential settlement value of future unknown claims. The settlement expense amounted to $3.1-million in the second quarter of fiscal 2023. The decrease in administration costs for the quarter is also due to lower outbound freight costs, which have now stabilized and sales commissions in relation to the lower sales volume. Finally, the decrease for the quarter was partially offset by a general increase in administration costs.
• Net loss (1) amounted to $2.1-million or 10 cents per share, compared with a net loss (1) of $3.7-million or 17 cents per share last year. EBITDA (2) for the quarter amounted to $3.0-million or 14 cents per share, compared with $1.4-million or six cents per share last year. The favourable movement in EBITDA (2) for the quarter is primarily attributable to the previously explained decrease in administration costs, partially offset by an increase in other expense. The positive movement in the company's results was primarily attributable to the previously mentioned factors combined with a favourable movement in income taxes and an unfavourable movement in finance costs.

First six months of fiscal 2024 (Unless otherwise noted, all amounts are in U.S. dollars and all comparisons are with the first six months of fiscal 2023.):

• Sales for the half year totalled $148.0-million, a decrease of $12.1 or 7.5 per cent compared with the last fiscal year. The decrease in sales for the half year is primarily attributable to lower shipments of large orders by the company's Italian operations due to a reduction of these orders recorded in the previous fiscal year. The decrease for the half year was also due to accelerated shipments in the fourth quarter of the prior fiscal year as a result of customer demand and the company's increased production ramp-up. The decrease in sales for the half year was partially offset by increased shipments in the company's North American operations. Otherwise, the decrease was also partially offset by the positive impact of the strengthening of the euro average rate against the U.S. dollar on sales, which amounted to $2.1-million for the half year, compared with last fiscal year. Finally, sales for the half year were also positively impacted by favourable revaluations of the company's provision for performance guarantees and volume rebate accrual.
• Bookings (2) for the half year amounted to $163.4-million, a decrease of $3.6-million or 2.1 per cent compared with the prior fiscal year. The decrease for the half year is primarily attributable to lower orders recorded by the company's North American operations. The decrease in North American bookings (2) for the half year is partly attributable to a reduction in MRO distributor orders, due in part to higher restocking orders in the previous year but also a slowdown currently observed in some covered markets. Additionally, the reduction in North American bookings (2) for the half year was also due to lower process orders compared with last year. The decrease in bookings (2) for the half year was partially offset by higher oil and gas bookings (2) recorded in the company's Italian operations, and an increase in nuclear orders recorded by the company's French operations. Finally, the decrease in bookings (2) was also partially compensated by the strengthening of the euro average rate against the U.S. dollar on bookings (2) for the company's European operations, which resulted in a favourable impact of $2.7-million on the half year compared with the prior year.
• The total backlog (2) increased by $21.3-million or 4.6 per cent since the beginning of the fiscal year, settling at $485.7-million at the end of the quarter. The increase in backlog (2) is primarily attributable to changes in the profile of scheduled backlog (2) shipment dates. The increase in backlog (2) is also due to the strengthening of the euro spot rate against the U.S. dollar since the beginning of the fiscal year, which represented $6.5-million.
• Gross profit for the half year amounted to $38.4-million, a decrease of $5.1-million or 11.8 per cent compared with the prior fiscal year. The gross profit percentage for the six-month period of 26.0 per cent represented a decrease of 120 basis points compared with the same period last year. The decrease in gross profit for the half year is primarily due to the lower sales volume which impacted the absorption of fixed production overhead costs, as well as unfavourable unrealized foreign exchange translations related to the fluctuation of the U.S. dollar against the euro and the Canadian dollar when compared with similar movements from the previous year. This decrease in gross profit for the half year was partially offset by an improved product mix, as well as favourable revaluations of the company's provision for performance guarantees and volume rebate accrual.
• Administration costs for the half year amounted to $44.1-million, a decrease of $6.4-million or 12.7 per cent. The decrease in administration costs for the half year is primarily attributable to the recording in the last quarter of the previous fiscal year of an asbestos provision for potential settlement value of future unknown claims. The settlement expense amounted to $6.3-million in the first six months of fiscal 2023. The decrease in administration costs for the half year is also due to lower outbound freight costs, which have now stabilized, and sales commissions in relation to the lower sales volume. Finally, the decrease for the half year was partially offset by a general increase in administration costs.
• Net loss (1) for the half year amounted to $10.4-million or 48 cents per share, compared with $11.0-million or 51 cents per share last year. EBITDA (2) for the half year amounted to negative $800,000 or negative four cents per share, compared with negative $1.5-million or negative seven cents per share last year. The favourable movement in EBITDA (2) for the six-month period is primarily attributable to the previously explained decrease in administration costs, partially offset by a decrease in gross profit and an increase in other expense. The positive movement in the company's results was primarily attributable to the same factors as previously explained combined with a favourable movement in income taxes and an unfavourable movement in finance costs.

Dividend

The company opted to declare no dividend this quarter.

Conference call

Financial analysts, shareholders and other interested individuals are invited to attend the second quarter conference call to be held on Friday, Oct. 6, 2023, at 11 a.m. EDT. The toll-free call-in number is 1-800-945-0427, access code 22028032. The material that will be referenced during the conference call will be made available shortly before the event on the company's website under the investor relations section. A recording of this conference call will be available for seven days at 1-416-626-4100 or 1-800-558-5253, access code 22028032.

About Velan Inc.

Founded in Montreal in 1950, Velan is one of the world's leading manufacturers of industrial valves, with sales of $370.4-million (U.S.) in its last reported fiscal year. The company employs approximately 1,650 people and has manufacturing plants in nine countries. Velan is a public company with its shares listed on the Toronto Stock Exchange under the symbol VLN.

Non-IFRS (international financial reporting standards) and supplementary financial measures

In this news release, the company has presented measures of performance or financial condition that are not defined under IFRS and are, therefore, unlikely to be comparable with similar measures presented by other companies. These measures are used by management in assessing the operating results and financial condition of the company and are reconciled with the performance measures defined under IFRS. The company has also presented supplementary financial measures. A reconciliation is provided in an attached table.

The term EBITDA is defined as net income or loss attributable to subordinate and multiple voting shares, plus depreciation of property, plant and equipment, plus amortization of intangible assets and financing costs, plus net finance costs plus income tax provision. The term EBITDA per share is obtained by dividing EBITDA by the total amount of subordinate and multiple voting shares.

Definitions of supplementary financial measures

The term net new orders or bookings is defined as firm orders, net of cancellations, recorded by the company during a period. Bookings are impacted by the fluctuation of foreign exchange rates for a given period. The measure provides an indication of the company's sales operation performance for a given period, as well as an expectation of future sales and cash flows to be achieved on these orders.

The term backlog is defined as the buildup of all outstanding bookings to be delivered by the company. The company's backlog is impacted by the fluctuation of foreign exchange rates for a given period. The measure provides an indication of the future operational challenges of the company, as well as an expectation of future sales and cash flows to be achieved on these orders.

The term book to bill is obtained by dividing bookings by sales. The measure provides an indication of the company's performance and outlook for a given period.

(1) Non-IFRS and supplementary financial measures.

(2) Net earnings or loss refers to net income or loss attributable to subordinate and multiple voting shares.

We seek Safe Harbor.