Studsvik AB
STO:SVIK
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Studsvik AB
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Ladies and gentlemen, thank you for standing by and welcome to the Studsvik Q2 2020 Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Tuesday, the 21st of July 2020.I would now like to hand the conference over to your first speaker today, Camilla Hoflund. Thank you. Please go ahead.
Thank you. Ladies and gentlemen, welcome to Studsvik interim report for the second quarter 2020. Let me introduce myself. My name is Camilla Hoflund, and I'm the CEO of Studsvik. And with me here today, I have Claes Engvall, our CFO. We will walk you through the Studsvik report for the second quarter 2020 and also share our updated view of especially the COVID-19 situation.Next page, please. Please, let me start with a brief introduction of Studsvik as a company. We have a strong characteristics, mainly in the nuclear industry, providing services to customers represented by the utilities, fuel vendors, international research organizations and regulators. We operate on a global market and have a strong international footprint. Our offerings cover several areas of the fuel and reactor life cycle from new build, operation, decommissioning to final disposal research. One of our key initiatives has been to expand beyond the nuclear into a new segment, medical isotope production.Next page, please. Please let me share the CEO view in brief. Studsvik offers services for the global nuclear industry to support safety and efficiency, adapting to our mission statement: we create customer solutions to complex problems using our proven ability to innovate. Nuclear power is a fossil-free energy source and, therefore, an important alternative in the energy mix to support clean energy. Studsvik is part of that industry vision.And then a little bit more here and now, the first half year started stable and our company improved our overall financial performance despite the COVID-19 that so far mainly has impacted our German operation. In the quarter, we continued to see improvements from our initiatives last year, such as cost-savings program, restructuring of organization and commercial negotiation. We have focused improvements in almost all business areas compared to the same period last year. Going forward, we still have the global uncertainties due to COVID-19. As for all companies, it's difficult to foresee the long-term impact on the market and in generally and specifically on our business. We continue to monitor the COVID-19 situation closely to adapt to any new circumstances to make sure that we have a safe situation for our people and for our operations.During today's report, I will walk you through the group summary with COVID-19 impact, following a more specific update of the business area. Then I will hand it over to Claes Engvall that will walk you through the financial highlights and outlook as well as identify the risks moving forward.Next page, please. People's health is our highest priority, and we apply the national regulations and recommendations. Our management are tracking the situation closely to be able to adapt the operation whenever it's needed. The impact of quarter 2 has been limited to the German operation about SEK 5 million. The Swedish site has been in full operation. That also is reflected in the financial performance for Fuel and Materials Technology. We still have a large number of employees worldwide working on remote. Due to travel restrictions, we start to see some delays in the market and sales activities for key offerings and new customers and especially for Waste Management Technology.Our main risks identified going forward are: temporary shutdown at the customer site in Germany; a shutdown on the facilities in Sweden or continued restrictions regarding transport; continued delay of new orders due to restricted travel policies. We work to mitigate business delays with remote solutions like digital sales and market approaches, which works to a certain level but is more challenging for new customers and new offerings. We hope that things turn out to be more stable and that we soon enter a post-COVID-19 state.Next page, please. Quarter 2 in brief. As mentioned, we had a stable quarter and an overall improved financial performance. Our improvement program from 2019 shows expected outcome. As reported, the COVID-19 impact has been limited so far and is related to the German operations. Overall for the group, we are improving sales and operating profit as well as having a stable cash situation for the quarter.The operating margin has improved from quarter 1, and in the current quarter, we reached 5.7% or we are at 8.7% excluding COVID-19 impact. The business and operations are progressing in the right direction, although we need to be prepared for a potential second wave of COVID-19.Next page, please. More specifically on Fuel and Materials Technology. A strong quarter with growth numbers. The business with customers in Asia and Russia are increasing over time. In the period, we have new business with Chinese customers that has a positive impact on the sales. We managed to keep a high and stable utilization on the operation all the way through to the summer break. As reported last time, the medical isotope production will start up in quarter 1 2021. The irradiated resources for the production will be delivered to Studsvik end of this year, and then we plan for a ramp-up of the production.The business area has a strong pipeline and a specific example is the offering to the Norwegian government Norwegian Nuclear Decommissioning, NND, including transport and treatment of the fuel in our facilities. We have not yet received the order. However, we expect to sign a contract of maximum NOK 150 million over 13 years in quarter 3 this year. NND has also officially expressed that they aim to do a larger purchase of transport storage and treatment for the rest of the fuel to an estimated value of NOK 1,500 million. NND has also mentioned that Studsvik has an interesting and competitive offer. This is very interesting for us as the offering we can provide is part of the core business of Fuel and Materials Technology, although we expect this opportunity to be implemented a few years ahead and the projects like this will be performed over many years, maybe up to 20 years.Next page, please. For Waste Management Technology, the net sales are in line with last year but with improved margin due to utilization of high-margin engineering business. The sales activity for the new technology license sales has slowed down due to the COVID-19 and travel restrictions. We keep us working on remote with market and business development activities. We have adjusted to the situation and focus on closing smaller pre-studies with customers in U.S. and Europe, and this is smaller steps that can open up for larger opportunities of licensing in the future. Next page, please. For Scandpower, we noticed that even with less sales, we have reduced the loss in the period due to increased engineering business and cost awareness. We have not closed any major license sales in the period. Scandpower has a strong brand and well-established network with the customers, especially on the home market in U.S. and in Asia. The business area has a strong pipeline on a broad geographic market and a good potential for closing a major license sale, although there is a risk of delays due to the COVID-19 and travel restriction.Next page, please. Finally, the German operation, an improvement in the quarter even with the COVID-19 impact of SEK 5 million in the period. The half year result shows the positive impact of the improvements from our initiatives last year, such as cost-savings programs, restructuring and promotion negotiation. Note that the numbers also include a COVID-19 impact of totaling SEK 8 million this year. At the moment, the staff are highly utilized due to the revision period. The order books are full for 2020, and we continue to build up the organization, including new management in the areas of decommissioning and engineering.Now I would like to hand it over to Claes Engvall for the financial status.
So then I would like to start with the financial highlights and the highlights of the quarter that we had an EBIT of SEK 9.6 million, which is a good EBIT for the second quarter, even historically. We have seen a solid development of the group's free cash flow, and I will come back to it a little bit more in detail later on. This has helped us to strengthen our financial position and also helped us strengthen the net debt-to-equity ratio, which has improved. I will come back to that also.Yes, like Camilla said, the impact we've had the first 6 months from COVID-19 is SEK 8 million, all of it pertain to the German operations.Next page, please. Looking at the specific group's earnings I would like to give some highlights. We have now in the quarter an operating margin of 5.7%, which is not reaching our target of 8% but well on the way of reaching the target of 8%. So that's a good improvement compared to previous year. We had a free cash flow in the quarter of SEK 11 million. And combined this year, SEK 35 million, that's really helped us strengthen the financial position. And just like I said before, we've also seen an improvement in net debt-to-equity ratio. Full year 2019, it was at 27.4%, and this quarter, it's now down to -- or end of the quarter is down to 16.2%. That's a good improvement.Next page, please. Looking at the improvements quarter-over-quarter, this year, we had a Q2 of SEK 9.6 million. Last year, we made a loss of SEK 8.1 million, all in all, an improvement of SEK 17.7 million. The bulk of the improvement derives from Waste and Material Technology (sic) [ Waste Management Technology ] where we have discontinued with the loss-making business. And as you're all aware of, we made some substantial reductions when it comes to cost level and also in business activities and concentrated. That's an improvement of SEK 13.8 million. And please also bear in mind that last year, we had nonrecurring items of SEK 5.5 million in Q2.We've also, just like Camilla mentioned, seen some good improvement in the German operations. We have improved customer contracts, better utilization rates and also cost-saving initiatives, so all in all, SEK 2.8 million. And bear also in mind that the quarterly impact from the COVID-19 situation is SEK 5 million for Germany.Scandpower improved base business, fairly much a stable business compared to last year. Whereas for Fuel and Material Technology, we have lost roughly SEK 2.6 million bottom line, which is then related to the delays of the Elekta production. And also, keep in mind that last year, we dissolved a provision of SEK 10 million in Q2.Other areas, we had an improvement of SEK 1.9 million, mainly referable to cost-saving initiatives, but also last year, we had a nonrecurring item of SEK 0.8 million. Altogether, deviation is SEK 17.7 million in improved profitability.Next page, please. The cash flow. Like we mentioned, we have a good improvement on the EBIT level. We have continued to focus throughout the organization on working capital. And we continue to monitor this and the cash situation on a very regular basis. We've seen some good improvements. The investment levels are lower this year. And also, we had some additional contribution from associated companies in the U.K. and Germany, which explain also then the good cash flow from investments. Altogether, for the first 6 months, a positive free cash flow of SEK 35.1 million.Next page, please. Looking at the future then, the financial outlook. We still foresee, just like everybody else, I guess, that there are still high uncertainties regarding the COVID-19 and the situation going forward. We monitor this on a very close basis, regular contact in the management team and also working very, very closely together with the local staff and just to catch risks and mitigating actions as soon as possible, but it's still an uncertain situation.For fuel and material, just like we informed last time, we have seen some delays in the deliveries of cobalt, which has led to deliveries or delayed deliveries to Elekta until Q1 2021. And this will impact our sales by roughly SEK 30 million. Last quarterly release, we said that we had a contract of roughly SEK 400 million, and the impact will be 7%. So that's the same number, basically. Besides that delay, we expect stable operations, so we don't foresee any major changes there, basically.Scandpower, we foresee a stable business for the full year. So no changes on our outlook for the full year.Waste Management Technology, we are well on track towards the improvement target of the SEK 10 million. And in Germany, we are also on track towards the SEK 10 million improvement program. The only issue we have with Germany is, of course, the impact from COVID-19.So next page, please. Looking at the financial outlook, continued, then we have other potential risks. We have spoken previously about the risk of trade conflicts and also issues concerning export control. Those risks have not changed, but they are still there, same level as previously.We have also informed that we don't foresee any major restructuring or items affecting comparability this year. Our cash level today, we foresee will be reduced somewhat towards the end of the year. And yes, like I said before, that our current investment level is a little bit lower than last year, and we foresee that the full year also will be lower than last year.And that concludes the presentation from me and Camilla. So we would very much like to thank you for joining this conference. And we hope you find the quarterly report even containing more information, if you want to have additional information.I would like to hand back then to the operator and then also open up for any additional questions. Thank you.
[Operator Instructions] And our first question comes from the line of Stefan Knutsson from ABG.
Congratulations on a fine report. I will start off by a question on Fuel and Materials. We saw a strong EBIT margin of 20% in the quarter. What was the main drivers of this margin?
There were several drivers, I would say. One was a very high and stable utilization with no planned or unplanned interruptions in the production line. And the other one was also a good commercial agreement with customers.
But nothing out of the ordinary that you can't take with you in the second half of the year then?
I think what you could say is that we had also a strong impact from Chinese business. But you also have to bear in mind that these kind of facilities need to do some maintenance and plannings and refurbishment. So of course, in this quarter 2, there was a very high utilization in that sense but from the ordinary business.
Okay, I understand. And going further into the Waste Management division, you were able to increase sales despite going from 45 to 33 employees. Was there any license sales in those number? Or was it just higher utilization there as well?
No, we didn't have any license sales, but we have an increased utilization on the U.S. market.
Okay. And if I understood you correctly, it was -- you highlighted the Waste Management segment as the most COVID-19 or highest COVID-19 risk in the second quarter or in the second half year.
Yes. I would say yes. So that there's no misunderstanding on what -- Germany was referred for the full -- the first 6 months. Going forward, what we can see, of course, on the preconditions that we don't see in the second wave in Germany is delays of business discussions pertaining them to Waste Management Technology. So that's correct, yes.
Okay. Perfect. And in Scandpower, you decreased sales, but you improved EBIT by almost SEK 2 million. Is this now the low level of the cost base that we see and that you will carry forward?
Yes. We can really comment that they made a good job on reducing the cost level. So we don't foresee this as a one-off, but we foresee it as a more steadily reduced cost level.
Perfect. And then I also have a question on Germany or the guidance on the cost savings in general. You mentioned that it was SEK 5 million negative effect on EBIT. So taking that into account, you seem to be very well ahead of the guidance you gave in the beginning of the year of SEK 10 million cost savings in Germany in Waste Management. Is there any reason to suspect a weaker performance in the second half of the year on those metrics?
I think you're quite correct that we are basically off to a very, very good start on the improvement programs. For Germany, again, it's the COVID-19 situation. We don't today foresee any issues. But again, please bear in mind that they have the revision period right now in Germany going into Q3, and then Q4 typically is a slower quarter for Germany.When it comes to Waste Management Technology, I would say we are not really sure about how the COVID-19 situation will impact the business discussions. So some of our customers have a difficult time carrying out business discussions on remote. So that kind of slows things down. But the impact is a bit too early to say. So it's more of a risk rather than anything else.
Okay. Perfect. And I have a final question regarding the cash levels that you mentioned that you foresee that they would be lower in the end of the year. What is the explanation here? Is it the higher working capital or some other thing?
One of the reasons is that typically for Scandpower get a lot of the payments for the maintenance in the beginning of the year. So we have a very strong one-off effect in the beginning of the year, which we don't have towards the end of the year. But we're not saying that there will be a big shift, but it would be somewhat a reduction towards the end of the year.
[Operator Instructions] Our next question comes from the line of [ Peter Gillen Hammer ].
I'm really pleased to read the positive numbers this time. I have one particular question with respect to Waste Management because you say, if I read it correctly, in last year, you had an operating loss of roughly SEK 20 million, SEK 19.6 million adjusted. And you now say that you have a SEK 10 million improvement you're having for that this year. Should that be read as that you're actually forecasting a SEK 10 million loss for Waste Management Technology the full year? Because that's the way I read your report. And secondly, how much have you received from the U.K., 15% ownership? And that is included, as far as I understand, in this operating result.
Okay. No. We got this question during Q1 and what we said basically, yes, it's correct that we -- if you exclude the MRIs, we made a loss last year of SEK 19 million, and then we have an improvement program of SEK 10 million. So of course, mathematically, we would be at minus SEK 9 million. So we got the question. And our answer was that but of course, we would not accept run -- to be running on the minus. And I think also what you can see from the numbers we have presented that we had a good start for the year. And the risks we are referring to when it comes to Waste Management is really the delays or the potential delays in business discussions. So of course, we don't have any big costs coming up or any maybe changes on the underlying business. And the number of staff has been significantly reduced. We have left loss-making contracts. So I think that probably answers your question.
No, basically, then I read you as saying that you don't expect also spending in kroners. You expect a much better result than that.
Yes, that for the full year.
That is correct.
That is correct. That's what we expect.
If I may be a bit critical, then I think that is what you should say. Because the way you have written it now, implicitly, you say we expect SEK 10 million of loss. But then you say now that you don't expect SEK 10 million of loss.
Okay. Point taken.
And I think that's -- I think, to be honest, I think it's very important that you guide the investment community in the correct way. This is a very cautious approach. But being cautious is not always correct. I think you need to be clear in that respect. And overall, I must say, although I started this by congratulating you, and I really mean that, but I think you talk so much about risks, COVID risks that may or may not be there. But you lift them up as being a potential threat, et cetera. But you have enormous opportunities in this company. And I really would like to see you, how shall I say, put those forward rather than talking about risks, et cetera. And also being the EBIT, it seems to be too cautious when, for example, you present the Waste Management outlook. So anyhow, I also wondered why do we pay taxes. Is that in Scandpower or? Because you have enormous tax losses. Sorry.
Yes, very much in the United States where we have a tax -- positive tax position, yes.
Yes. But because in the group, you have enormous tax losses, are these actual cash tax payments? Or are they just provisions for potential tax? Is that money going out?
In the income statement, to some extent, it's potential tax, whereas in the cash flow, it's actually taxes paid.
Right, for the group. Excellent. And then my final question was, you mentioned Elekta that SEK 30 million of sort of annualized turnover did not happen this year. Again, how certain do you feel about the ramp-up in Q1 '21? And secondly, what return on sales do you expect on that? Because it's basically using the same [indiscernible]. So I suppose the margins are very good.
I can start with the first question. And of course, we are dependent on getting the sources, the irradiated transported to our hotel facility. But at the moment, it's running as planned. And the reactor is supposed to stop somewhere in the September time frame. And then we definitely know that we are on good track. But everything seems to be towards getting the deliveries end of this year as planned. So we have no other signals that it wouldn't be that case.
And then the second question was a question about margins. We don't comment on margins for individual contracts.
[Operator Instructions] There are no further questions at this time. Please continue. Thank you.
Thank you very much, everyone, and take care and hope to talk to you again in quarter 3. Have a nice summer. Bye-bye.
Thank you. Bye-bye.
Thank you, speakers. That does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please stand by.