Earnings call transcript: Velan Inc. reports Q2 2025 sales dip, strategic growth in nuclear

Velan Inc. (VLN) reported its financial results for the second quarter of 2025, revealing a 13% year-over-year decline in sales to $67.6 million. Despite the drop in sales, the company maintained a positive outlook, particularly in the nuclear sector, and highlighted strategic contracts and operational expansions. According to InvestingPro analysis, the stock appears undervalued based on its Fair Value calculation, though it’s worth noting the company’s overall financial health score is currently rated as weak. The stock currently trades at $1.84, significantly below its 52-week high of $3.50.

Want deeper insights? InvestingPro subscribers have access to 8 additional key tips about Velan’s financial position and market performance, along with comprehensive valuation metrics.

Key Takeaways

• Velan’s Q2 2025 sales decreased by 13% year-over-year, totaling $67.6 million.
• The company secured a $15 million contract for reactor cooling valves.
• Velan’s order backlog increased to $285.8 million, with 88.3% deliverable within 12 months.
• The company reported a net loss of $1.7 million, or $0.08 per share.
• Velan is optimistic about growth in the nuclear and oil & gas sectors.

Company Performance

Velan Inc. faced a challenging second quarter with a significant decline in sales, primarily due to $12 million in rescheduled deliveries and tariff-related purchasing delays. However, the company remains a leader in the valve market for critical applications, with a strong presence in North America and growing markets in Asia Pacific. Velan’s strategic focus on the nuclear sector and recent contract wins position it well for future growth.

Financial Highlights

• Revenue: $67.6 million, down 13% year-over-year
• Adjusted EBITDA: $3.4 million
• Operating Income: $0.4 million
• Net Loss: $1.7 million, or $0.08 per share
• Order Backlog: $285.8 million, up 4% from the start of the year

Outlook & Guidance

Velan Inc. remains confident in its growth potential, particularly in the nuclear sector, and expects multi-year growth in the oil & gas market. The company is exploring capital structure optimization and has maintained its dividend at $0.10 per share. With $96 million in available cash and financing, Velan is well-positioned to capitalize on emerging opportunities.

Executive Commentary

CEO James A. Mannebach highlighted the company’s strategic positioning, stating, "We’re seeing a lot of expansion activity as refiners and producers continue to try and extend the useful life of their investments." He also emphasized the promising start of the Saudi joint venture, noting, "The pipeline [for Saudi joint venture] is very, very robust."

Risks and Challenges

• Supply Chain Disruptions: Continued tariff-related purchasing delays could impact future sales.
• Market Volatility: Geopolitical shifts may affect market sentiment and demand.
• Restructuring Costs: The company incurred $700,000 in restructuring expenses, which could affect profitability.
• Inventory Management: A $10 million increase in work-in-process inventory may pose challenges if demand fluctuates.

Velan Inc.’s Q2 2025 results reflect a company navigating a complex market environment while strategically positioning itself for future growth. Despite short-term challenges, Velan’s focus on innovation and expansion in key sectors underscores its commitment to long-term success.

Full transcript - Velan Inc. (VLN) Q2 2026:

Conference Call Operator: Good morning, ladies and gentlemen, and welcome to the Velan Inc. Q2 financial results conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, October 10, 2025. I would now like to turn the conference over to Rishi Sharma, Chief Financial Officer. Please go ahead.

Rishi Sharma, Chief Financial Officer, Velan Inc.: Thank you, operator. Good morning, bonjour. Thank you for joining us on our conference call. Let’s start by discussing the disclaimer from our related investor relations presentation, which is available on our website in the investor relations section. As usual, the first paragraph mentions that the presentation provides an analysis of our consolidated results for the second quarter ended August 31, 2025. The Board of Directors approved these results yesterday, October 9, 2025. The second paragraph refers to non-IFRS and 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 are not guaranteed to occur. Forward-looking statements contained in this presentation are expressly qualified by this cautionary statement. Finally, unless indicated otherwise, all amounts are expressed in U.S. dollars and all financial metrics discussed are from continuing operations.

I will now turn the call over to James A. Mannebach, Chairman of the Board and CEO of Velan Inc.

James A. Mannebach, Chairman of the Board and CEO, Velan Inc.: Thank you, Rishi. Good morning, good afternoon, good evening, everyone. Please turn to slide four for a general overview of the second quarter of fiscal 2026. We reported adjusted EBITDA of $3.4 million and operating income of $0.4 million on sales of $67.6 million during the period. Our performance in the quarter, which fell short of our internal expectations, was negatively affected by the need to reschedule certain deliveries, totaling more than $12 million, mostly to adapt to changes in customer requirements. Moreover, delays in purchasing decisions due to tariffs, largely for spare part orders, which are typically booked and shipped in the same quarter, further dampened sales in the period. It’s important to note that rescheduled orders are part of firm contracts, which have simply been pushed out in time and will be delivered in the near future.

For certain orders, small outstanding items prevented revenue recognition, and for others, greater complexity in part due to change in customer requirements led to these delays. In fact, we’ve already shipped orders related to the delays, totaling approximately $5 million early in the third quarter, with the remainder now planned for delivery later in the third quarter or before the end of the fiscal year. We delivered the first order from our new manufacturing plant in Saudi Arabia, which is part of a joint venture in the Middle East dedicated to addressing the largest market for oilfield valves worldwide. This milestone follows the prior approval and certification from Saudi Aramco for some of our key valves. Velan is fully prepared to deliver in this region with a promising pipeline already in the works. Now let’s turn to slide five.

Our order backlog reached $285.8 million at the end of the second quarter, up 4% from the beginning of the year. At quarter end, 88.3% of the backlog, representing orders of $252.4 million, was deliverable within 12 months. This compared to 91.3% at the end of Q2 last year. As I’ve stated last quarter, the shift in delivery schedule was driven by continued securing of an increasing number of large, long-term contracts for the nuclear and defense industries. Bookings amounted to $65.2 million in the second quarter of fiscal 2026, compared to $88.4 million in the same period last year. Order intake early in the third quarter rebounded with significant contract and MRO earnings throughout the world.

Notably, we were recently advised of an award for certain reactor cooling valves related to the refurbishment of an Ontario reactor, totaling more than $15 million, confirming the strength of our position supplying the most critical valves in the rapidly growing nuclear industry. To this point, among the key projects booked in the second quarter of last year was a main services agreement with GE Hitachi as part of the provision of a small modular reactor, or SMR, at Ontario Power Generation’s Darlington site, on which I’ll further expand in a moment. As we turn to slide six, I’m particularly pleased that this key infrastructure project was recently fast-tracked by the Canadian government through the newly implemented Major Projects Office. The office’s role, as outlined by the federal government, involves streamlining regulatory assessment of approvals, as well as helping structure, finance, and partnerships with all stakeholders.

The main objective is to significantly reduce the approval time for the projects identified as of national importance. Clearly, Velan stands to benefit from the pending acceleration of projects that typically require an extended planning period, such as nuclear. As a reminder, we have more than 55 years of experience in supplying valves to the nuclear power market with deep expertise providing leading reactor technologies. More specific to the Darlington project, which happens to be the first SMR deployment in North America, Velan is a supplier of choice for GE Hitachi Nuclear Energy. Under the terms of our agreement, we are providing the development of advanced technology, engineering support, and leading-edge proprietary valve technology for the safe and efficient operation of this first of four planned SMR units.

This project has the potential to position Canada as a global leader in nuclear energy and rely on Velan leading valve providers in critical applications in the growing deployment of SMR technology. In summary, on slide seven, nuclear and clean energy represent key growth sectors for Velan, both in Canada and increasingly on a global basis, as customers move to reach their own carbon reduction objectives. Let’s not forget that we’re also fortified with a very solid footing in other markets, such as oil and gas, where our valves equip the vast majority of refineries in North America and a growing base worldwide, which will further expand through our Middle East joint venture. Defense activity also continues to rise as sovereign states are addressing their national security concerns.

With our proven solutions for both surface and subsurface nuclear marine propulsion, we expect positive development in the years to come and continue growth. With the strength of our brand and our proven abilities to address complex needs for the most demanding flow control applications throughout the world, we are very confident in our ability to sustain growth in our backlog. Before turning the call over to Rishi, let me assure you that after permanently resolving our asbestos-related liabilities and completing the sale of our French assets, as announced earlier in the year, we remain quite active considering capital structure options to ensure the company remains well-positioned to fully achieve its growth ambitions and its determination to maximize shareholder value. This wraps up my presentation. I’m going to turn it over to you, Rishi.

Rishi Sharma, Chief Financial Officer, Velan Inc.: Thank you, Jim. Turning to our second quarter results of slide nine, sales totaled $67.6 million, down 13% from $77.7 million a year ago. Since last year’s second quarter included a non-recurring revenue of $5.2 million related to a canceled agreement, the comparable year-over-year sales decreased about 6.7%. As previously mentioned, the decrease was mainly caused by rescheduling of order deliveries, specifically from our North American and Italian operations, and by tariff disruption. In fact, uncertainty resulting from the changing tariff regimes had dampened demand from valves, spare parts, and MRO throughout the U.S. as customers continued to defer purchasing activity, awaiting the final outcome of ongoing tariff negotiations. Partially offsetting these factors were higher sales in Korea, India, and China, as well as greater MRO sales in North America.

By customer geographic location, North America represented 55% of total sales in the second quarter of fiscal 2026, compared to 51% last year. Asia Pacific accounted for 26% total revenues versus 12% a year ago. For its part, Europe represented 12% of sales in the second quarter compared to 20% last year. Finally, Africa and the Middle East, as well as South and Central America, rounded off our sales for the quarter. Moving to slide 10, gross profit reached $15.7 million compared to $20 million last year. The decrease was primarily due to lower sales volume, which negatively affected the absorption of fixed production overhead costs and a less favorable product mix. In addition, tariffs had a dual impact on gross profit, first by impacting supply chain optimization and second by causing a timing lag between the moment they are incurred and subsequently passed on to customers.

These factors were partially offset by positive foreign exchange gain. As a percentage of sales, gross profit was 23.2% versus 25.7% last year. Administration costs decreased to $15.4 million or 22.7% of sales in the second quarter of fiscal 2026, from $16 million or 20.6% of sales a year ago. The year-over-year variation reflects lower sales commissions, reduced freight costs, and additionally, cost improvements in our day-to-day spending. We also incurred restructuring expenses of $700,000 in the second quarter of fiscal 2026, which consisted of transaction-related costs. Excluding restructuring expenses, adjusted EBITDA amounted to $3.4 million versus $6.7 million last year. The year-over-year decrease can be attributed to lower gross profit, partially offset by reduced administration costs. Net loss, meanwhile, totaled $1.7 million or $0.08 per share in the second quarter of fiscal 2026, compared to a net loss of $1.2 million or $0.05 per share last year.

Excluding restructuring expenses, adjusted net loss amounted to $1.2 million versus adjusted net income of $2.8 million a year ago. Briefly, on slide 11, for the first six months of fiscal 2026, sales were up nearly 1% or close to 5%, excluding last year’s non-recurring revenue, while gross profit was relatively stable both in dollars and as a percentage of sales. Turning to cash flow from operating activities on slide 12, before changes in provisions, we used $16 million in cash in the second quarter of fiscal 2026, compared to generating $4.7 million a year ago. The unfavorable movement in cash was due to lower profitability and negative changes in non-cash working capital items versus last year. For example, significantly more late-stage work-in-process inventory related to the changes in delivery schedules increased working capital requirements.

Work-in-process inventory was up $10 million in the second quarter alone, and we expect a cash inflow as projects are shipped and paid for. In the period, we also paid $6.8 million in dividends, representing the regular payments for dividends declared in May and July, as well as the $0.30 per share special dividend declared earlier this year. As for the next payment, the Board of Directors declared yesterday a dividend of $0.10 Canadian per share, payable on November 27, 2025, to shareholders of record as of November 13, 2025. Our dividend policy reflects our growing firm order backlog, confidence in our future performance, and our ability to sustain strong cash flow generation. Finally, our financial position as of August 31, 2025, remains strong with cash and cash equivalents of $36.1 million and short-term investments of $400,000.

Bank indebtedness stood at $6.6 million, while long-term debt, including the current portion, amounted to $15.9 million. Considering our undrawn $35 million credit facility, working capital financing, letters of credit, and guarantees, we have access to nearly $60 million in additional cash flows. As a result, Velan has $96 million readily available to execute its strategy and finance its expansion to sustain long-term profitable growth. I will now turn the call over to the operator to begin the Q&A session.

Conference Call Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star, followed by the two. If you are using a speaker phone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Sébastien Charland with Agave Capital. Your line is now open.

Good morning, Jim. Good morning, Rishi. My first question today, it’s maybe a little more philosophical. In terms of this cycle in nuclear, I think it’s pretty clear where we’re at. It’s increasing. I know sometimes there can be some thawing or freezing with all that happened in the last year, but clearly there’s a growing demand worldwide. What would you say we’re at, or what are you seeing on the oil and gas side in terms of CapEx investment, perhaps, and growing capacity, or like where do you see us in that cycle for that industry?

James A. Mannebach, Chairman of the Board and CEO, Velan Inc.: Yeah, good question. I think what we’re seeing in the marketplace, and I’m going to guess, and you know it depends on where you’re looking at, is upstream, midstream, or downstream. For our primary markets, we’re seeing a lot of expansion activity as refiners and producers continue to try and extend the useful life, so to speak, of their investments. It’s good news for us. As you know, we’re quite prevalent in all those markets. I think there’s been a rebound generally in the sentiment with the change in the administration in the U.S. concerning the desirability or attractiveness of oil and gas in general. I think that the indicators that are heading in the right direction are positive already. How long that will last? I suspect it’ll be a multi-year. It’s not quite as long in terms of lead time, generally speaking, as in the nuclear industry.

Certainly, once committed to, we’re talking about several years of deployment.

Makes sense. Thank you. The next one might be for Rishi, but feel free. It’s more on the gross margin ballpark. I know in the previous year, and I think last year I had a question, the $5.2 million cancellation, I think it was related to a Russian-tied entity for BP or in Vietnam, something like that. I was questioning how should we go about forecasting gross margins in the future? I know now you throw in a mix or a mélange, as we say in French, with the USMCA that’s in Geopolity, the tariffs, and all the impacts on the supply chain. Should we forecast or adjust slightly down on the gross margin side going in the future, or is there a lag?

I understand there’s a difference between the time that you book at a certain price and you deliver, and then there’s a tariff that comes in between. I guess if I have to summarize it, do you pass it on to customer at some point, or should we just forecast it down?

Rishi Sharma, Chief Financial Officer, Velan Inc.: Yeah, I’ll take the question in three parts. The first one is yes, it’s a contract that we have for a Vietnam end user that was backed by essentially a Russian VPC. The $5.2 million that was the cancellation charge last year, you can essentially remove that from sales and it was at zero profit, if you remember what we discussed. That normalizes Q2 at FY2025. On the gross margin in the mix, I think we’re still very confident in terms of the normal levels we’ve been seeing in the last few quarters. When you look at tariffs, yes, exactly, there’s a delay between when we pay the tariffs as the goods cross into the U.S. versus when we collect, let’s say, surcharges or additional charges from our customers. I think the year-to-date impact for us is just under $750,000 in net exposure.

I think we’re controlling it well with the footprint that we have in terms of us negotiating with our customers. Finally, Jim spoke about upstream, midstream. Our business in that sector has two components. There’s the bare valves, as you call it, and then there’s the actuation. We don’t manufacture our own actuators, so it’s generally a buy-through and a pass-through of a markup. As the mix for upstream, midstream proportionately changes on the total revenues, you’ll see some movement on the overall margin. We’re still very confident. As Jim mentioned, the large order we’re securing in nuclear, we have the defense contracts in the backlog that we’re executing. The gross margin over the last few quarters, I think, is still what we’re targeting.

Okay, that’s really helpful. My last one is considering the capital structure optimization comments. Are we more looking at perhaps preparing for larger, longer-term contracts? Whether it is growth CapEx, refinancing, or even upsizing the facilities that you have for letters of guarantees, that kind of stuff that may be required, or more on the buybacks, dividend, or even small acquisition side?

James A. Mannebach, Chairman of the Board and CEO, Velan Inc.: Yeah, I think principally what we’re looking at is we see a period of growth in some industries such as nuclear, significant growth into the future for the industries. Our presence in those industries, as we’ve commented on several times, is quite critical. Consequently, it’s incumbent on us to make sure that we have the capital structure in place that allows us to fully realize that growth potential. In terms of the dividend, you know, we had advised, I think it was in the last quarter, that based on the strength of the business and our forward look, we had increased our recurring dividend to $0.10 per share and confirmed that again this quarter. Some consideration of capital structure in that domain is also ongoing, as you would expect by the board quarter in and quarter out.

All right. That’s it for me. Thank you so much.

Thank you, Jeffrey.

Yep.

Conference Call Operator: Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Alessandro Ciarnelli with SM Investors. Your line is now open.

No, thank you so much. Hi guys, hope everything is fine.

James A. Mannebach, Chairman of the Board and CEO, Velan Inc.: Hey Alessandro, yeah.

Just out of curiosity, I ask you what is the utilization rates of your manufacturing facilities today and then compared to, let’s say, a year ago in general, and then, if you can, for the Montreal standalone.

We don’t disclose the utilization rates by plant. I would say that the company has sufficient capacity over its planning horizon to support substantial growth without the need for extraordinary capital addition. Our equipment stock in our positions in Canada and the U.S. and around the world is quite good, quite robust in terms of supporting the growth. As you know, our CapEx traditionally is $9 million to $12 million, $13 million annually. Sometimes it goes up and down depending on our investment in additional capital machines. I think that probably is sufficient. It’s more replacement and upgrade. We have a wonderful preventative maintenance program throughout our network of plants, which allows us to extract maximum utilization of our machine stock.

Of course, like anything, as time goes by, tolerances increase, and we make prudent investment from time to time in key machinery to ensure we continue to meet all tolerances.

Thank you for that. I appreciate it. I don’t know if you answered this already. Sorry. Looking at the revenues down, right? The commentaries of the $5 million one-time last year, the push out of $12 million, which my understanding is $5 million already came back, and another $7 million for the rest of the year. Would it be wrong for me to say, if I adjust for all that, the revenues were actually up? Is that a wrong way to look at it or no?

Did you say would that be wrong? Are you asking that in the negative or the positive?

loss in upcoming quarters.

I’m teasing you. Yeah, I think that’s exactly the right conclusion to draw. You know, we had some late-in-the-quarter changes and delays with customer receipts that, if those shipments had occurred in the second quarter as I said, originally planned, revenues would have been up.

Rishi Sharma, Chief Financial Officer, Velan Inc.: I’ll just add, Alex, to that. Today, we recognize revenue on completed contracts. As we see longer-term contracts, if you had P.O.C. accounting-based for RevRec, then it would be a bit more stable. That’s something of consideration for the future.

Thanks. Just, you know, an accounting item. I see the taxes. I think in the report, it states that our taxes were up because of, I guess, taxing the individual, the legal entity versus consolidated. That means that last year, you were looking at the taxation was on a consolidated basis, and this year is different, or did I miss that? Related to that, what are your cash taxes? Thanks.

Are you talking about the quarter or year-to-date?

The quarter, sorry.

Yeah, I think quarter, I mean, the variation in the quarters is just the taxable income that’s generated in each of the legal entities. With Q2 this year, we have certain legal entities that generate taxable income. There was a catch-up in certain entities that have differences in year-end versus reporting periods for filings that result in assessments that go up and down. Q2, you’ll generally have a bit of that catch-up or realignment for the year. It’s not more than that in terms of the cash tax expense. We do not, as you know, recognize and have not recognized deferred tax asset on the balance sheet. That creates a tax rate that’s significantly higher when you look at the tax income that’s generated. As we move now forward to profitability for our annual quarter, if you look at net income, it’s what we’ve done in the last eight quarters.

That’s something that’s also going to be for discussion.

James A. Mannebach, Chairman of the Board and CEO, Velan Inc.: Yeah, I think underscoring that point on our balance sheet, or off our balance sheet, I suppose, is a better way of putting it. We have combined the non-operating loss carryforwards in our income of over $100 million under IFRS because of the company’s performance prior to the turnaround that started in 2023. We hadn’t met the threshold or closing in on the threshold of reestablishing any of those credits. This is an accounting section. At the end of the day, if we have $143 million of combined NOL and tax credits that will shield our earnings for many years to come. I think that, you know, in modeling needs to be certainly taken into account, the cash advantage of utilization that involves into the future.

Yeah, that’s great to say. Of course, even after the French disclosure. I had a last question, which you might have answered again. Sorry, I was out for five minutes. Some color on the Saudi joint venture. How does that work? I factor in facilities, the first order, and then, you know, what kind of pipeline do you see there? Thank you.

Yeah, sure. It’s a good question. As you know, we commissioned and opened the Saudi joint venture in the first quarter of our year. That had been laid off, as I think I commented on it the last quarter, for some time as we looked at the prior strategic option review and the closer saga we’ll call it. We’re very, very pleased with the rapid growth of this joint venture. It’s exceeding our expectations at the moment. Of course, first you have to secure the approvals, the nine coms, as we call it, Aramco. You have to then produce some limited basis product in accordance with that certification. Basically, the doors are open for additional orders. The pipeline is very, very robust. I think the backlog is already exceeding $500,000 US.

This is rather remarkable given that this joint venture has only really been in place and operative for six months, maximum nine months, something like that. We’re quite pleased with that and very bullish on what we see developing in the Middle East, not only in Saudi Arabia, but also in the surrounding parts of the world there, where we really, quite frankly, haven’t focused as intently as perhaps is possible and certainly will be the case going forward. Saudi Aramco, as you know, is by far, by far the largest producer in the world. We look very confidently with that joint venture. Thanks for bringing it up.

Same for me. Thank you so much.

Okay, have a great weekend.

Conference Call Operator: There are no further questions at this time. I will now turn the call over to Jim for closing remarks.

James A. Mannebach, Chairman of the Board and CEO, Velan Inc.: Thank you, operator. We appreciate your help, always. Thank all of you for joining us today. We look forward to sharing our third quarter results with you in January and hope you have a good weekend. For friends in Canada, a happy Thanksgiving weekend. We’ll look forward to talking with you again soon. Bye for now.

Thank you.

Conference Call Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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