Studsvik AB

STO:SVIK

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and thank you for standing by. Welcome to today's Studsvik Q1 2021 Conference Call. [Operator Instructions] And please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Camilla Hoflund. Thank you. Please go ahead, ma'am.

[Camilla Hoflund]

Thank you very much. Ladies and gentlemen, welcome to the Studsvik interim report for the first quarter 2021. Let me introduce myself. I'm Camilla Hoflund, the CEO of Studsvik. And together with me today is Claes Engvall, the CFO of Studsvik. We will walk you through the Studsvik report for the first quarter 2021. Next slide, please. In summary, the financial numbers for the first quarter have improved compared to last year. The highlights in the quarter are the business area Decommissioning and Radiation Protection Services with operating profit margin of 9%. Now the business area has managed to deliver on the high demand from customers with the outcome of a high utilization throughout the organization. The business area Fuel and Materials Technology has reached a milestone, a backlog of about SEK 1 billion. Important to reach this milestone has been the previous already press-released major agreements signed earlier this quarter with TVEL Russia for about SEK 100 million, the Institute for Energy Technology, IFE, Norway, worth about SEK 130 million. So all in all, Decommissioning and Radiation Protection Services and Fuel and Materials Technology have a solid ground established in the beginning of the year. Next page, please. Now a little bit more on the business area Decommissioning and Radiation Protection Services that had a strong growth and an operating -- strong operating margin. The business area made a great achievement and managed to meet the high demand of decommissioning services from customers mainly in Germany, which also, as mentioned before, the outcome we have was a high utilization throughout the business area. If we look into the strategic pillars for the business area, we can see that long-term customer relations is very important to be a reliable partner. And Studsvik has a number of large organizations that we have served for many years and still maintain our customers. Studsvik is well positioned as a proven reliable partner in Germany and Switzerland. Next important strategic pillar would be the strong market presence throughout Germany. And what we mean with that is that the business area have a strong staff presence at customer sites throughout the German market. By being on site, our people have direct experience of the operation of these nuclear plants as well as decommissioning experience from other similar plants. This experience has proven invaluable when the customers of operating units move into the decommissioning phase by helping the customer to reduce risk and cost. The operation is a people business. Our continued development depends on having the right people and growing the individuals. As an example, we are working with innovative ideas of education together with the Mannheim University of Applied Science. So all in all, a very good quarter and a very good performance from the local management team in Germany. Next page, please. Fuel and Materials Technology where we achieved the milestone of have increasing the backlog and actually meeting the target of SEK 1 billion. Also in the business area, we can see an increased sales quarter-on-quarter impacted by the project mix, and we also have performed the hot cell maintenance that had an impact of SEK 5 million on the operating profit. The backlog of SEK 1 billion is to be delivered during 2021 to 2027 with the major part until 2025. A little bit looking into the strategic pillars for the business area Fuel and Materials Technology. Increasing business with new customers, the breakthrough in Asia last year for customers in China and South Korea open for increased business in Asia. Studsvik, through its proven track record in fuel qualification, our commercial nuclear fuel offer, offers an efficient and independent fuel qualification program, employing world-leading technologies. Much like any of the Studsvik offering, this experience reduces risk and cost for the fuel vendors trying to introduce their new fuel products to the market. The business area is also expanding into new areas, such as decommissioning or back end, especially dealing with spent fuel after decommissioning nuclear facilities. These tasks often focus on addressing a safe and efficient way of handling highly radioactive materials that need to be conditioned before store for a very long period of time. This task requires customized solutions to very complex problems, which is a part of Studsvik's established brand. One example is the recent signed agreement with IFE and Norsk Nuclear Decommissioning, NND, for loading equipment, transport, handling equipment, examination and pretreatment of nuclear fuel from the research reactor JEEP I at Kjeller. Another strategic initiative for expanding into new markets is also expansion beyond nuclear. For example, a new segment Studsvik has expanded into is the medical isotope production field. Through our innovation, the business area have created a unique automated robotic production of isotopes encapsulation for Elekta's medical Gamma Knife device. And this is performed in our hostels in Sweden, just one example of where experience meets innovation and Studsvik creates something different and valuable for our customers. Another strategic pillar will be, of course, that new orders require increased capacity. With the very strong backlog we have, we now have to deliver for the future and for the growth. The business area has highest focus in the program to increase the capacity in our existing hotel facilities and to recruit quite many people and create innovative ways to improve the efficiencies throughout the facility and operation. Finally, I would like to mention the third strategic pillar, international programs. The business area has a target to increase the number of long-term programs with customers representing the global nuclear industry. These programs are collaborative network of world-leading specialists that support the industry with new technologies and high-value results that drive both efficiency and safety. So I think this business area is on a good pattern moving forward into the growth phase. Next page, please. Scandpower, our business area that is well positioned on a global market. Comparison between the years shows the phasing of license sales that differs and has a smaller impact on sales and operating profit. The business area's position on the domestic market, U.S., is strong, and the customers are interested in Studsvik's core monitoring software, GARDEL. And I'm very pleased to welcome Rob, Robert Whittle, as the new President for Scandpower business area. Robert has a software background with more than 30 years of international business development and innovation experience. He also has a significant experience of growing revenue, which is what we have been looking for in this position. Robert's assignment is to grow our world-leading software business. However, we need to be realistic that this will take some time. Looking into the strategic pillars for the business area Scandpower. New geographical markets, and we can summarize that some of the key drivers are the reactor and fuel vendor independent. And this -- the purpose is to gain price competition. And also the Studsvik brand, our years of global software experience, that reduces the risk. The business area targets customers in Eastern Europe and new emerging nuclear countries. For example, it's recently announced that Barakah Unit 1 in UAE is in commercial operation, the first nuclear power plant in the region. The other strategic pillar is to support new reactor technology, and the key driver would be fuel vendor independent again. Most new reactor vendors do not have their own fuel management software and do not want to use fuel vendors or competitor software systems. And again, Studsvik has a proven track record of developing and managing complex software systems to support reactor safety and efficiency and the new reactor technologies such as small modular reactors, SMRs. So we are very excited to see what this can bring into the future. Next page, please. Business area Waste Management Technology where we are heading towards efficient waste transformation. The business area continue with high focus to breakthrough for a first customer for Studsvik innovation in waste management called inDRUM technology. inDRUM is an innovative technology that can treat waste locally on site, reducing the risks associated with transport and significantly reducing the volume. The business area has commercial discussions with customers in Europe and North America. However, there is a time component with long lead times and efficient processes. The strategic pillars for the business area, technology supporting global need to handle waste, I think we heard it many times that it's a fact. One financial uncertainty and risk for the nuclear industry is treat and store the radioactive waste. This is the same regardless of existing nuclear facilities or planned new nuclear technologies, such as small modular reactors or molten salt reactors. There is a growing demand to deal with the legacy waste, which has accumulated for various reasons on nuclear sites for many years. The second strategic pillar is environmentally safe and cost-efficient technologies. Nuclear waste storage is taxed by volume. Studsvik innovation technology reduces waste as much as 90%, translating directly into reduced waste storage tax the waste owners otherwise would have to pay. There is also a requirement for the waste to be stored in an environmentally safe manner. One of the distinguished features of Studsvik technology focus on stabilizing the waste and to support a safe transport and long-term storage. Next page, please. The group had a stable start of the year. The growth is 6.5. And some of you might be aware that we have a Studsvik group target of 10%. The operating profit margin is about 5% compared to the Studsvik group target of 8%. And the group continued to generate positive free cash flow of almost about SEK 10 million. The investments within the group are mainly within the business area Fuel and Materials Technology and to increase the capacity in the facilities. Next page, please, the outlook for the business areas. For the full year 2021, Studsvik sees a strong order book for Decommissioning and Radiation Protection Services. Fuel and Materials Technology will restart the medical isotope production to Elekta and deliver in the new agreement. Furthermore, Scandpower is pursuing new market opportunities in East and West and Middle East, while Waste and Materials -- Waste Management Technology is deploying the new innovation, inDRUM technology, as the main business driver. Next page, please. This summarized the quarter 1 for Studsvik. Thank you very much for listening in to our interim report. And now over to the operator and Q&A session, please.

[Operator]

[Operator Instructions] And we have your first question from the line of Stefan Knutsson.

[Stefan Knutsson, Research Analyst]

First up on Fuel and Materials, you mentioned that you require increased capacity to handle the new orders. Can you talk a little bit more about that? And is it a substantial investment that is needed?

[Camilla Hoflund]

It's not a substantial investment, and it is within our existing facilities.

[Stefan Knutsson, Research Analyst]

Okay. Perfect. And then additionally, we saw in the news about the waste in Forsmark and that you need to bring it back to Studsvik. What implications will that have? And yes, can you elaborate a bit?

[Camilla Hoflund]

In principle, we have no more news than that we had within the press release, and we are taking the same statement that we have in the press release.

[Stefan Knutsson, Research Analyst]

Okay. And finally, if we looked a bit on the decommissioning area, you mentioned that the order book is well covered for 2021. But if we look a bit broader, where would you say that Germany and Switzerland are in the decommissioning phase if you look at the whole market?

[Camilla Hoflund]

Can you clarify the question a little bit, Stefan?

[Stefan Knutsson, Research Analyst]

Yes. We know that Germany, for example, has a plan to close down a lot of their nuclear facilities. Just wonder if you could specify a bit where you see that -- how far the country has come in terms of the decommissioning process.

[Camilla Hoflund]

I think there are a lot of decommissioning activities ongoing already. And as you know, it's -- very soon, all the reactors would be closed down in Germany. And I think for our positioning, we are well positioned, and we have a good mix of things that we are doing that is for decommissioning already and some things that we are doing for the -- there's very few reactors that still are in operation.

[Operator]

Your next question comes from the line of Pål Jarness.

[Pål Jarness]

This is Pål Jarness speaking. I have a question. In Q4, Waste Management Technology reported a -- let's say, an exceptionally high sales revenue. And then it was explained in the investors' call that there was made a, let's say, corresponding provision in the sales and marketing cost, I believe, that was driving that item, so more or less neutral in Q4. Do you have any comment as to how that has developed for Q1 this year?

[Camilla Hoflund]

Yes. Thank you for the question, Pål Jarness. We have no updated information at this point of time, so it's the same as we have the last time. No progress at this point of time.

[Operator]

[Operator Instructions] And we have your next question from the line of [ Anders Steen ].

[Unknown Analyst]

Sorry for the technical problems. My name is [ Anders Steen ]. And I have some questions for you. The first one is with respect to what was said in the Q4 presentation that EBIT recognition from renewed license agreements had been postponed into 2021 due to COVID-19. Has that been recognized now in Q1 and in what amount?

[Claes Engvall, CFO & Secretary to the Board]

I'm not really sure if you're referring to the same question as Pål Jarness he has posed. And then if that is the case, then the answer is yes, like Camilla said, that we have no further information as the situation is the same.

[Unknown Analyst]

Okay. So no EBIT -- delayed EBIT, so to speak, from Q4 has been recognized in this quarter?

[Claes Engvall, CFO & Secretary to the Board]

That's correct.

[Unknown Analyst]

Okay. Next question is with respect to your M&A agenda. Do you have an M&A agenda? Or are you actively pursuing M&A activities, add-on acquisitions?

[Camilla Hoflund]

Yes. Thank you for the question. But unfortunately, this is nothing that we can share any information about at this point of time.

[Unknown Analyst]

Okay. The question was not if you have anything in your pipeline really. It was just I have been watching or listening to these calls now for a couple of quarters, and M&A is not mentioned as one of your strategic initiatives. So my question was really more if M&A is on your agenda, generally speaking, yes.

[Camilla Hoflund]

Yes. Unfortunately, I have the same answer, but I cannot comment any further on this.

[Unknown Analyst]

Okay. Just a question about the maintenance stop in Q1. Is that kind of maintenance stop done annually? Or is it biannually? Or what's the frequency?

[Camilla Hoflund]

That kind of stop is maybe on an average, every third, four -- every third or fourth year about.

[Operator]

Your next question comes from the line of Peter Gyllenhammar.

[Peter Jan Patrick Valentin Gyllenhammar]

It's Peter Gyllenhammar here. We just heard and we have also read in the annual report that your financial objectives are, amongst others, to achieve an 8% return on sales. When you look at the numbers for the respective businesses, your order book, et cetera, it seems that your objective is to lower your return on sales actually. I'm quite stunned that -- I mean when manufacturing and distribution companies generate double-digit return on sales without having much technology, a superb high-tech and growth business like Studsvik, where you can already see important parts of it generating double-digit return on sales, has an 8% return on sales, to me, it looks like a failure. You need to lower your return on sales in order to reach your objective. What is your comment to this? Because I think this -- before you answer it, I think it's a very important thing for you to consider that this is a guidance to the stock market, to the financial market, to your owners, to shareholders, et cetera. So my question is, is your financial objective really an 8% return on sales?

[Camilla Hoflund]

Thank you, Peter, for your comments, and of course, you may have your comments. But I can tell you that my focus is, of course, to deliver a profitable growth for the company. And of course, that wouldn't stop at any point of time. So that's really the main target. And when it comes to reviewing any financial targets, at the process and when we have something new information, we will inform you about that together with -- to the rest of the market, of course.

[Peter Jan Patrick Valentin Gyllenhammar]

So shall we read this as your current view is that an 8% return on sale is a satisfactory objective for your company?

[Camilla Hoflund]

Unfortunately, Peter, I have no further comments on this.

[Peter Jan Patrick Valentin Gyllenhammar]

But this is very important because this is a signal you send, this is your opportunity to communicate with the stock market and your shareholders. And if you present the guidance, which is not what you really believe is achievable, I think you're misleading the stock market and the shareholders. And with your SEK 1 billion order book, which relates to your most profitable division where you obviously can make 15% return on sales, if you look at your historical performance, I find it flabbergasting that you present an 8% guidance to the market.

[Camilla Hoflund]

The order book, which you know, Peter, is, of course, to be delivered over many years, so it's not happening in the first years. But this is the information we have at the moment, and we have no further information to share.

[Peter Jan Patrick Valentin Gyllenhammar]

Okay. I find it, let's call it, interesting.

[Operator]

There are no further questions at this time. [Operator Instructions] There are no further questions at this time, ma'am.

[Camilla Hoflund]

Thank you, and thank you very much for today.

[Operator]

Thank you very much. And that does conclude our conference for today. Thank you for participating. You may all disconnect.