Studsvik AB

STO:SVIK

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Studsvik Q1 2022 Conference Call.

[Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would like to hand over the call to your speaker today, Ms. Camilla Hoflund. Thank you. Please go ahead.

[Camilla Hoflund, executive]

Thank you very much. Ladies and gentlemen, welcome to Studsvik Interim Report for the first quarter 2022. Let me introduce myself. My name is Camilla Hoflund, I'm the CEO of Studsvik. And with me on the call today, I have Niklas Karlsson, the CFO.

We will present the results of the Studsvik group performance and financials for the first quarter. So let me start with as for the very sad but actual subject, we are following the geopolitical situation and the invasion of Ukraine to assess both short-term and long-term risk. As for Studsvik's own operations, they do not fall under the sanctions today imposed on Russia, but Studsvik has made a decision to put the Russian customer, TVEL, project on hold.

Next slide, please. Let me present a brief introduction of Studsvik and the global trends for our industry. There are drivers for the nuclear energy that come into play today even stronger than before. With climate change the negative trend is continuing and the world need to reduce the carbon dioxide emissions, CO2. The energy demand, there is an increased focus on sustainability when it comes to energy supplies. Considering the energy need for the future, the demand will increase rather than decrease.

Last but not least, the geopolitical situation. Many countries are looking into being more self-serving and this applies also to the energy. In this context, nuclear is an energy source that many countries have or are expected to have as a key source in their energy portfolio. In the light of the global situation, Studsvik is an independent organization with a vision innovating nuclear sustainability to support the world with safe and efficient solutions. Our customers are mainly within the nuclear field from new reactor build and operational support for existing reactors to decommissioning a nuclear power plant, including radioactive waste solutions or environmentally safe final disposal.

Next slide, please. In summary, the sales in the quarter increased by 13%. The operating profit is slightly decreasing due to the pandemic and altered mix of services that had an adverse impact on earnings within decommissioning and radiation protection services.

Fuel and Materials Technology performed a strong start of the year with a high capacity and good margins. At the end of the quarter, Scandpower signed a cooperation agreement for artificial intelligence, for optimization of operation and loading of fuel to broaden the range of services offered for the boiling water reactors.

Next slide, please. For the business area of Decommissioning and Radiation Protection Services. The business area had a slow start of the year and the net sales and the result is impacted by the pandemic and higher cost for sickness absence of our own people and as well as cost for external suppliers to compensate for our own resources to meet the customer deliveries.

Also the first quarter of 2021 had more revenues from decommissioning projects with higher margins compared to the first quarter of 2022. In coming months, refueling and maintenance initiatives will start and with less impact of the pandemic, the capacity and utilization are expected to increase back again.

Next slide, please. For the business area of Fuel and Materials Technology, the performance of the business area was stable on the higher capacity level and with higher margins. In the same period the previous year, a maintenance work was carried out that restricted the capacity in the facility.

The business area has business with Russia for materials testing at Studsvik facilities and manufacture radiation sources that are used to fight cancer around the world. At the end of this quarter, the business with the Russian customer, TVEL, for material testing was put on hold. The replanning of the customer project has been made to compensate as much as possible for the TVEL project.

Next slide, please. The business area of Scandpower. The business area had a smaller license sale that was signed in the quarter. The business area has strengthened resources for future initiatives which impacts the operating profit in the short term. At the end of the quarter, a cooperation agreement was signed, artificial intelligence solution for optimization of operation and loading of fuel. This is a new initiative that broadened the range of services offered for boiling water reactors.

Next slide, please. For the business area of Waste Management Technology, the sales growth consists mainly of advisory services within waste management. And for the service, we are using external subsuppliers. This business gives lower margins compared to the license business and associated engineering services. However, this is a good entry to understand the customers' waste problems and solutions needed to optimize the waste handling, which also could give potential new license opportunities. There are a number of commercial discussions ongoing for conceptual design studies and test programs for our waste technologies.

Next slide, please. Negative free cash flow can be explained by increased tied-up of working capital, mainly due to building-up of work in progress related to customer projects, mainly within Fuel and Materials Technology.

Next slide, please. So what about the outlook? The strength of decommissioning and radiation protection services is to combine the expertise to support a safe, efficient and sustainable decommissioning service. The business area had a slow start on this year and is expected to improve in the upcoming months with revision work starting in Germany and Switzerland and hopefully a lesser impact by the pandemic and sickness rate.

The unique platform of international customers give the Fuel and Materials Technology in the channels for marketing and sales to both existing and new customers. The business area will focus on new opportunities to keep the strong order book and to compensate for potential delays and losses for the Russian TVEL project.

For the business area, Scandpower, is focusing on closing license sales and to review the business model, including the commercial conditions and the software portfolio, a new initiative is also to look into partnership to broaden the portfolio.

For Waste Management Technology, the focus is to close a license [indiscernible] with engineering support. And more likely, it will be a first phase, including conceptual design and test program.

Next slide, please. Thank you for listening to Studsvik Q1 interim report. And now I hand over to the operator to open up for the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from the line of [ Stefan Jameson ].

[Unknown Analyst]

I just want to know a bit more about the situation with the Russian business. Will you be able to restart at all during the year? Or is this market now completely dead as for now because of the war?

[Camilla Hoflund, executive]

Thank you very much for the question, Stefan. As mentioned on the call, we are not under any sanctions today with performing the business. And while we are doing this, put on hold is because of the uncertainty for the future. But also we put on hold, it means that we do not start any new phases in the big TVEL project. But however, we will phase out some of the ongoing phases to finalize [ part of ] subprojects. And how it looks for the rest of the year, it remains to be seen. So it's not that the relations are ended in any way, but we have to follow and see how the situation and risk will develop over time.

[Unknown Analyst]

And have you made any consequences calculations because according to my estimate, at least it was kind of large deliveries expected from Russia in this year because of the larger contract that you won 2 years ago. And if you will be able to compensate that by deliveries to other customers?

[Camilla Hoflund, executive]

As you know, we have this strong order book in Fuel and Materials. So what we are doing now is we're planning, like I said on the call and the decision was made at the end of the quarter. And of course, we would try to compensate as much as possible. And with the strong order book we have, we will be, for sure, able to compensate. But exactly if we can compensate everything, it's a little bit too early to say.

[Unknown Analyst]

Perfect. And then I also have a follow-up question regarding the Decommissioning business area and the transitioning there from going to -- yes, from the German shutdown to more of a, yes, business post that period. This was the second quarter in a row with negative margins, but you guide for improved utilization in the coming quarters. I mean just looking long term, is there anything structurally that has changed then that we should expect a lower profitability long term? Or is that will you still be able to post the numbers that you did prior to this period when you have, yes, completed the transition?

[Camilla Hoflund, executive]

Thank you. And it's a very, very good question. And we do not foresee any major changes that have changed the picture for us in a little bit more longer perspective. We foresee the same opportunities, and we have for also this year, the full order book. But actually, in Q1, we had a little bit -- like we said, not a little bit, we had an impact of the pandemic, but not only because of the pandemic as such, but people had to be in quarantine and other things. And also on the customer side, some of the projects were put on hold or delayed, but we foresee as when we are coming back and everything is business as normal, we will be able to be back on the levels we had before.

[Operator]

[Operator Instructions] And we have our next question from the line of [ Per Medstrat ].

[Unknown Analyst]

I have a question from the Fuel and Materials Technology area. You said that it's increased business with new customers. Could you give some color about what type of customers it is?

[Camilla Hoflund, executive]

The business area has, as you probably are aware of, entered new markets in Asia last year, within the fuel area, for example, with these customers in China, but also a customer in South Korea. And then -- so that is in the fuel project area. And also in the decommissioning and the back-end side, we have new customers in Europe that we are speaking with programs to perform within decommissioning area, so to say, within Fuel and Materials Technology.

[Unknown Analyst]

Okay. There is no customers in medtech besides Elekta maybe?

[Camilla Hoflund, executive]

We will definitely look into more into medtech, and we are like you probably know, this year, ramping up slowly this -- not slowly, but ramping up the Elekta production. So we have produced to Elekta four sets so far in the Elekta contract. And I think it's a good timing to later this year start to look into how we can broaden that business. But nothing today that we can share or have any information about.

[Unknown Analyst]

Okay. And one final question about Russia. Is there any one-off cost you have taken for this quarter?

[Camilla Hoflund, executive]

No, no. No of anything.

[Operator]

Our next question is from the line again [ Stefan Jameson ].

[Unknown Analyst]

I just have a follow-up on the working capital buildup. Will you be able to release some of that during the year? Or will it be an elevated level of working capital throughout the year?

[Niklas Karlsson, executive]

We believe it will be released during the coming quarters.

[Operator]

[Operator Instructions] And looks like we don't have any further questions. Please go ahead and continue.

[Camilla Hoflund, executive]

Well, thank you very much, everyone, that has been listening today to the Studsvik Q1 report, and thank you, operator.

[Operator]

So that does conclude our conference for today. Thank you all for participating. You may all disconnect.