Studsvik AB

STO:SVIK

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Studsvik Q3 2020 Conference Call. [Operator Instructions]I must advise you that this conference is being recorded today, Friday, 23rd of October 2020. I would now like to hand the conference over to your first speaker today, Camilla Hoflund.Thank you. Please go ahead.

[Camilla Hoflund]

Thank you. Ladies and gentlemen, welcome to Studsvik interim report for the third quarter 2020. Let me introduce myself, Camilla Hoflund, and I'm the CEO of Studsvik. And with me, I have Claes Engvall, the CFO of the company. We will walk you through the Studsvik report for the third quarter 2020 that shows the results overall expectation. Next, Page 3. Studsvik is a company with a strong characteristics, namely in the nuclear industry, providing services to customers represented by utilities, fuel vendors, international research organizations and regulators. We are independent organization that operates on a global market with a very strong international footprint. Our offerings cover several areas of the fuel and reactor life cycles for new build reactors in operation, decommissioning, including radioactive waste technologies, to final disposal research. One of our key initiatives has been to expand beyond nuclear into a new segment, medical isotope production. We have one of a kind automated robotic installation in our hot cells in Sweden for production of isotopes. The company Studsvik started life at Studsvik site, 100 kilometers south of Studsvik on the Baltic Coast in Sweden. Studsvik has continued to evolve and grow over the 70 years into a truly global company and now have bases in Sweden, Germany, U.K., U.S., Japan and China. We are a global organization and our employees support customers worldwide across the whole nuclear fuel and reactor cycles. Next page, please. Studsvik offers services in 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. When working with our customers, we challenge them, too, to think differently and support them towards the long-term goal of delivering reliable and more sustainable energy to the growing population of the world, with our vision statement that they can make a difference, making it easy to benefit from clean nuclear energy.This quarter, we have shown strong progress in our international business development within the fuel qualification with orders on new markets like China and South Korea. This breakthrough, in combination with our already very strong market position in Europe, U.S. and Russia, puts us in a world-leading position when it comes to fuel testing and analysis. During today's report, I will walk you through the group summary, following with more specific update of each business area, then I will handle over to Claes Engvall, that will walk you through the financial highlights and outlook as well as risks moving forward. Next page, please. It is a great pleasure to present the quarter 3 results for you today. The turnaround program within Waste Management Technology and the German operation have been performed, and the outcome has exceeded all expectations. We also have good news to share from the other business areas. Scandpower have managed to sign license sales that has a significant impact on the results within the period. Fuel and Materials Technology has received significant orders from China and Korea within fuel testing in our hot cell facility in Sweden. And note, then we still have the Norwegian order to come in the future. Studsvik as a group has a very limited impact of the COVID-19 pandemic. And in quarter 3, there is no impact at all. The German operation is showing increased sales and an outcome of well performed revision. In summary, in quarter 3, Studsvik Group managed to deliver well above the external communicated group targets of growth 10% and operating margin, 8%, we are definitely moving in the right direction. Next page, please. Fuel and Material Technology. This is a stable quarter with planned summer vacations for the operations, although there have been a lot of activities within the market and sales. After several years of persistent business development work, we have made a breakthrough in both China and South Korea. At the same time, both markets are important, and we expect this business to grow over time. As reported earlier, the medical isotope production is delayed as we are waiting for deliveries of irradiated sources for the production. Last call, we mentioned that we expected to sign the contract with the Norwegian government in NND, Norwegian Nuclear Decommissioning, for transport and treatment of fuel in our facilities within the quarter 3. The status is that we have agreed on the contract terms for a project of about NOK 130 million, although the signing is postponed pending clarification of responsibilities between the Norwegian parties. Next page, please. Waste Management Technologies. The financial effects from the turnaround is well above expectations. In general, the sales activities for new technology license sales have slowed down due to the COVID-19 and travel restrictions. Therefore, we have no major license sales in the period. However, we have received small orders for pre-studies for different waste technologies. These pre-studies of the orders, are from customers in U.S., Europe and Asia, and they have the potential, of course, to be the beginning of a larger license sales for the future. We foresee a ramp-up of the business beyond COVID-19. Next page, please. Scandpower. This quarter, we have signed major license sales for software on the home market in the U.S. for about SEK 20 million. Usually, we receive larger sales at the end of the year. The market and sales team have increased the digital activities to promote our world-class software and applications. The response is very positive from our customers in U.S., Europe and Asia. There is a temporary slowdown of the business in China, depending on the U.S. election. Next page, please. Finally, the German operation. The turnaround of the German operation has been a success. The performance has improved, and we see the impact on the financial numbers. This quarter shows the increased sales due to higher customer demand during the revision. To manage our obligations for our customers, we had a temporary engagement with subcontractors for the peak period that impacts the margin. The order book 2020 are full and we continue to build up the organization, including new management in the areas of decommissioning and engineering. No negative impact of COVID-19. However, local COVID-19 outbreak remains a risk. Now I handle over to Claes Engvall for the financial status.

[Claes Engvall, CFO & Secretary to the Board]

Thank you, Camilla. I would spend some time to take you through the financial highlights. So next page, please. As you have seen from Camilla's presentation, we had a quarterly EBIT of SEK 23.1 million, which we're very, very happy about. In this quarter, we have no items affecting comparability. And also, just like Camilla stated, there has been no COVID-19 impact on our performance this quarter as opposed to previous performance this year -- with COVID-19 impact this quarter. Looking at the EBIT, and we are happy to say that compared to last quarter and previous year, we made of improvement of SEK 90 million net of ROI. And if you compare the complete period Q1 to Q3, we made an improvement of SEK 60 million on EBIT level. The group's available cash are at quarterly closing at SEK 86 million. And 1 of the reasons why it's not higher is that we saw some good sales towards the end of the quarter and also an increase in accounts receivables. Next page, please. Some of the highlights for this quarterly closing includes then the operating profit, of course, SEK 23.1 million, which take us to an accumulated profit this year of SEK 36 million. We have seen, just like Camilla said, we've have seen a operating margin in the quarter, which is above our target of 8%, and we came in at 12.3% for the quarter. Accumulated this year, we have a profit margin of 7.1%. The free cash flow this year has been very positive. However, yes, just like I said previously, we saw some good sales toward the end of the quarter, affecting then the working capital through increased accounts receivables. And also, we have seen a strengthening of our financial situation and an increase or an improvement in the net debt-to-equity ratio. Next page, please. Looking at the performance this quarter as opposed to the previous quarter last year, we made an improvement of SEK 27 million. The previous amount I was referring to was net of MRI, this is including MRI, therefore, the difference. Then in Waste Management Technology, we saw an increase of SEK 15.4 million, of which MRIs accounts for SEK 8.5 million. Just like Camilla said, this is related then, of course, to the turnaround we made last year and the effects we announced started to see. The Scandpower, we made some good sales in Q3 that we were more expecting to come in, in Q4, but we saw them already in Q3. It improved the profit by SEK 12.8 million. And for Germany and Fuel and Material Technology, we saw a stable development as compared to the previous quarter -- the corresponding quarter last year. All in all, an improvement of SEK 27.2 million. Looking at the cash flow. Just like I said, we have had a good development of the free cash flow. Very, very much related then, of course, to the strong EBIT made. We had some -- just like I commented before, some impact on working capital due to increased accounts receivables. We have an investment level so for this year of roughly SEK 50 million, which is then also related to the adverse effect from -- and counteracted by the dividends we have received from associated companies, which accounts for the cash flow from investments. And then the other, of course, is mainly related to -- we're putting back the depreciation. So it doesn't have any cash effect. Altogether SEK 25.2 million in positive development on the free cash flow. So our financial situation as compared to 1 year ago is much more stable and has been more stable for quite some time now. Next page, please. Financial outlook. Starting with Fuel and Material Technology. We are expecting a stable operation in 2020. And also, we would like already now to highlight that in Q1 next year, we will make a maintenance -- and the maintenance is part of the hot cell as the Studsvik site with some impact, though, a minor impact. At Scandpower, we also expect a stable business for 2020. However, just like Camilla commented, there is a risk of loss of momentum in the Chinese business pending the U.S. elections. We're not very, very sensitive profit wise to the Chinese business this year, but it might have some smaller impact in case the tension is further strengthened between the United States and China. And therefore, impairing our ability to do business in China. Waste Management Technology, here, we are very, very happy to state that we now believe in a breakeven or above for 2020. As you will remember, last year, 2019, we made a big loss in this area, part of which was explained by MRIs. But excluding the MRIs, we made a loss of almost SEK 20 million. We had a target of a profit improvement of SEK 10 million. And now we are happy to state that we foresee a development, which is even more positive than we previously said. In Germany, we met a loss of SEK 1 million last year. And now we are expecting to exceed somewhat the SEK 10 million target we set out. And please bear in mind also that this target is including the negative effect we've had during Q1 or Q2, mainly for COVID-19 in Germany, which accounts for SEK 8 million. Germany, the underlying has also been a very, very successful turnaround for. Next page, please. The financial outlook is very much, of course, related to COVID-19. In our operation today, we don't -- like we said, we don't see any negative impact right now. However, we are very cautious because we get mixed signals from what's happening. We get a lot of seeing what was happening in Germany, and we are paying a lot of attention in monitoring the COVID-19 situation. That still remains a risk for us. And the same thing goes for political tension, trade conflicts that might impair our ability to do business in certain areas. Looking towards the end of 2020, we don't foresee any major restructuring items affecting comparability. Just like we stated before. The cash level, we are expecting to improve towards the end of 2020 as compared to the level we had end of the third quarter. And also, I would like to inform you that we have still not received any ruling from the Land and Environmental Court concerning the bank guarantees for the guarantees future waste management costs. That concludes my presentation and Camilla's presentation and before we hand over to the Q&A session, we would like to thank you all for joining and listening in on our conference call. And so please back to [ Baladan ] and see if we have any questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Stefan Knutsson from ABG.

[Stefan Knutsson, Research Analyst]

Regarding the accounts receivables that were increasing, is that connected to the orders in China and South Korea?

[Claes Engvall, CFO & Secretary to the Board]

No, it's connected to the Scandpower order.

[Stefan Knutsson, Research Analyst]

Okay, okay. Perfect. And then also on the Waste Management, it was a very strong improvement in the EBIT margin. Was that expected on this level? Or is it sustainable? Or was it some temporary drivers here?

[Claes Engvall, CFO & Secretary to the Board]

I would -- I know Stefan you listened in also on the Q2 telephone conference. And I would say that the turnaround has gone faster than we expected for the business area. And also, of course, just like we stated previously, we will not accept any business making a loss. But actually the turnaround went faster than expected.

[Stefan Knutsson, Research Analyst]

Perfect. And then also on the Scandpower and the license deals, I saw that you like made a year-over-year improvement of around SEK 13 million on EBIT. Is that comparable to what we should expect from a license deal, I mean, around 65%, 70% incremental EBIT margin on a license deal for Scandpower.

[Claes Engvall, CFO & Secretary to the Board]

No. Just like we wrote in the quarterly report is that Scandpower is very, very difficult to predict when we will get these license sales. And sometimes when we get them in Q4, which is kind of a typical year. And this year, we got them in Q3 instead.

[Stefan Knutsson, Research Analyst]

Yes. But I mean, year-over-year, you improved the EBIT -- the absolute EBIT by SEK 13 million in Scandpower. Is that a good estimation on how much license sales will contribute to EBIT?

[Camilla Hoflund]

Yes. Camilla here. I can try to answer your question. I think you need to see that there is a big range when it comes to license sales. There are a lot of smaller licenses that we are doing on a regular basis, but then they are not that big or having the big impact and of course, lower in the sales level. So it's a big range. But when we get a bigger license sales like this one, then it has a huge impact.

[Stefan Knutsson, Research Analyst]

Okay. Perfect. I got you there. And then my last question is regarding the U.S. election. Do you think it will be higher risk for any business impact if Biden wins the election because he is more pro to green energy?

[Claes Engvall, CFO & Secretary to the Board]

I think there are 2 answers to the question. I mean this is, of course, our interpretation of the situation is that, maybe it's not such a big difference in the long run between Trump's approach to China and Biden's approach to China. That's 1 comment. So we're not expecting if Biden wins that things will change dramatically. However, I think there are some question marks concerning Trump's actions within the next couple of weeks and then depending on the development. So it's more related to what's happening actually in the last -- next couple of weeks. But not in the long run. Because in the long run, we don't really see any change or any difference between the 2 candidates for China. I think -- what we think they will have, basically, the same approach.

[Operator]

Our next question comes from the line of Pål Jarness, a private investor.

[Pål Jarness]

I have a question on the dividend from associated companies where the year-to-date difference down September 2020 versus last year is quite big. And actually, I see it came in Q2, that difference, can we expect -- I mean, historically, it's been quite, let's say, even dividend from mainly the U.K. business flowing through on this line. But now we see a big, let's say, jump in Q2 then back to flat in Q3. Is this a change in that business? I can't remember what was driving the higher dividend in Q2. Can you remind me on that?

[Claes Engvall, CFO & Secretary to the Board]

Of course. Thank you for asking the question. Of course, in the underlying, we have LLWR in the U.K. But this time we're in Q2, we had one-off effect from an associated company, our joint venture in Germany. So it's only a one-off effect. It will not we will not repeat it, and you can't expect anything like that in the future.

[Operator]

There are no further questions at this time. Please continue.

[Camilla Hoflund]

Then we say thank you very much for listening in today, and have a nice weekend. Bye.

[Claes Engvall, CFO & Secretary to the Board]

Thank you. Bye-bye.

[Operator]

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