Studsvik AB

STO:SVIK

Earnings Call Transcript 2021-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the Studsvik Q3 2021 Conference Call. [Operator Instructions]And please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Camilla Hoflund. Thank you. Please go ahead.

[Camilla Hoflund]

Thank you, operator. Ladies and gentlemen, warm greetings and welcome to the Stock Interim Report for the third quarter 2021. I am Camilla Hoflund, the CEO of Studsvik. And today, I'm pleased to introduce you to our new CFO, Niklas Karlsson. Niklas has financial experience from several high-tech companies working both in Sweden and internationally. Together, we will present to you today the summary of Studsvik third quarter and the financial results. To begin with, this was not a quarter from group levels that met our expectations. However, we are expecting improvements in quarter 4 to finish the year in a strong way. Next slide, please. First, a brief introduction of Studsvik. Studsvik is listed on NASDAQ, Stockholm Small cap with the revenue in 2020 of about SEK 720 million. The 6 main markets is the commercial neutral industry. Most of the customers based in internationally, ranging from power producer utilities to governmental organizations associated with the nuclear power. Studsvik has roughly about 500 employees based in Sweden, Germany, U.S., U.K., Switzerland, Japan and China. Together, they support customers globally associated with the whole nuclear power life cycle. Studsvik is an independent organization that operates on a global market with a strong established international brand. Our value chain covers customer needs within the nuclear field from new reactor build to operational support for existing reactors to decommissioning of nuclear power plants, including radioactive waste solutions for environmentally safe and final disposal. Our customers represent -- is represented by the whole industry, ranging from fuel vendors producing the fuel for the nuclear power plant, the nuclear power plant owners and operators, public agencies, research centers and other nuclear facilities associated with the nuclear power industry. Additionally, we are expanding beyond the nuclear power to expand into the radioisotope industry and the medical isotope production using our extensive experience and technical skills. From the nuclear power industry, we are developing an automated line for nuclear isotopes used in our existing facilities at the Studsvik site in our hotels. Next slide, please. In summary and the group summary for the quarter, the net sales for the quarter are in line with last year and increasing year-to-date. However, the operating profit, excluding sale of land at Studsvik site compared to last year is lower in the quarter. The main reason for the deviation is lack of previously expected license sales within the Scandpower business area. Year-to-date, the operating profit, excluding sale of land, is about the same as for last year. The highlights in the quarter, Fuel and Materials Technology signed a new agreement with the Chinese customer for approximately SEK 40 million. This is an important step to further strengthen Studsvik's position in the expanding Chinese market. The project will begin year-end. Studsvik has signed a sale of the an area of land on the Studsvik site. This generated a result of SEK 11.5 million in the quarter with a positive cash flow impact of SEK 16 million. In summary, this is the quarter with no license sales and lower utilization in the operational Fuel and Materials Technology due to the vacation period. Next slide, please. The commission decommissioning and radiation protection services delivered a stable performance with improved margins. The business area performed a strong quarter during the revisions at nuclear power plants in both Germany and Switzerland. The operational profit within the quarter and year-to-date have improved compared to last year due to higher utilization, improved commercial contracts and no currency impact so far this year. The remaining nuclear power plants in operation in Germany will shut down in 2022. This will create additional demand for Studsvik as these plans in form of our decommissioning services. We anticipate and expect that we are well positioned to meet the requests from the customers. The market shift in Germany to more decommissioning services and less traditional decontamination services as of today will take some years. And Studsvik is also expanding into services in Switzerland, and in the future, we expect also to expand in Belgium and Netherlands where we already have long-term customer relations. Next slide, please. in fuel materials due to seasonal variations, quarter 3 shows about the same operational profit as last year. The increase in net sales is mainly due to transport activity. Generally, the transport projects have a lower gross profit margin due to larger external purchases for services, and this is also the case year-to-date. The business area is ramping up for a strong year-end performance, and please let me share some activities from the quarter. The first important transport from Asia has started to come to Studsvik site in Sweden. This time from China, a transport from South Korea has started with material arriving for our services before year-end, and will be the first of a kind achievement. The business is preparing for increased volume to work in our facilities and activities to improve the performance. The new order from China is adding to the backlog and the projects will start this year. All in all, there are several activities that are expected to have a positive impact in quarter 4. Within the quarter, one step of medical isotope has been produced and delivered to the end customer. Another step will be produced this year, and we are expecting deliveries of [indiscernible] at the end of this year, and the plan is to increase the production for next year. Next slide, please. Scandpower. There has been no larger license sales within Scandpower in the quarter. This is the main difference compared to the numbers for the quarter and year-to-date compared to last year. There are ongoing commercial negotiations of several smaller license opportunities, and the expectation is to close some of them before year-end. It is important for this business area to enter new geographical and technical areas. Market and sales activities through several new markets are underway. Unfortunately, an expected tender in one of these new markets where we have a strong position has been withdrawn, and that is Ukraine. Another important long-term activities is application of Scandpower's products to new technology reactor vendors such as small modular reactors called SMR. Scandpower has already today cooperation with customers within the SMR vendors. The business area is also focusing on expanding the capabilities into advanced reactor design. Vendors, which are being designed, demonstrated around the world. However, these are long-term R&D initiatives. Next slide, please. Waste management technology. The results for the quarter includes the participation fee from U.K. nuclear waste management called LLWR of SEK 2.2 million. There was no new license business signed in the quarter. However, there are smaller opportunities [indiscernible]. These small contracts are expected to open for license opportunities, both in Europe and North America. Recently, we've began pursuing several new governmental initiatives, research grants that support research, development and demonstration for waste technologies needed to treat the waste quantities and problematic radiative waste. An example is Japan, and other one is U.K. The driver is not only volume reduction and cost savings, but also meeting social license, community acceptance and the environmental aspects. Our waste technologies are competitive options supporting environmentally safe and cost-efficient solutions for this pragmatic way. Next slide, please. Group financials. As mentioned before, the operating profit excluding sale of land at the site amounts to SEK 10.5 million for the quarter and SEK 35.8 million year-to-date. The main reason for the deviation compared to last year is the lack of license sales within Scandpower. The investments to support the expansion within fuel an Materials Technology and site infrastructure upgrades have increased compared to last year. These investments are, however, in line with previously defined expansion plans for the business area. Next slide, please. So the outlook. As mentioned in the beginning of this call, the Q3 results for Studsvik Group has not met our expectations. We do expect an improvement in the fourth quarter especially from increasing work from fuel and materials technology and closing of license opportunities from Scan Power. Our waste management technology, it's more difficult to predict the timing of license sales in the short term. However, the newly acquired smaller contracts, we believe will lead to future license sales. Next slide, please. Thank you for listening to the Studsvik Q3 Interim Report and over to operator and Q&A session, please.

[Operator]

[Operator Instructions] And we've got one question on the line from the line of Stefan Knutsson from ABG.

[Stefan Knutsson, Research Analyst]

Camilla, I have a couple of questions. The first regarding the decommissioning business area. I mean, how do you view this segment after this year is done? I mean has it peaked in Germany and will enter a slow decline for the coming decade? Or how does the market dynamic look like now and when Germany is approaching shutdown mode?

[Camilla Hoflund]

Thank you for the question, Stefan. I think it's fair to say that always in a kind of a transit you might see some kind of slowing up or adjustments that is needed. So next year, you might see a little bit tendency to that, but I think we are very well prepared on how to address this. And like I said, that switch even if the reactors so down next year, but to switch over to this more purely dismounting decommissioning will take a few years. So we can see that the people and the staff we have are really needed for many more years to come. And then over time, of course, there will be a huge demand and request for these kind of services.

[Stefan Knutsson, Research Analyst]

And I suppose also that you mentioned that you're looking to expand beyond or into Switzerland even more and also looking for other cloud countries. I expect that you have a vision that those revenues from those countries can also offset this negative effect that we'll see from Germany?

[Camilla Hoflund]

Absolutely. That very, very true. And we have also, during the year, the last 3 years, increased the confidence within the organization all the time. So I think we are quite well prepared to be on on the higher level when it comes to competence and in these areas, too, and to make sure that we are one of the partners that you want to have as a supplier.

[Stefan Knutsson, Research Analyst]

Perfect. And I also have a follow-up question on the profitability in this segment. Now you have posted year-to-date EBIT margin of over 11%. Would you say that this is sustainable? Or should we expect it to revert back a couple of percentage points going into next year?

[Camilla Hoflund]

That -- we don't predict in the sense that I would say that maybe with the comments I gave you before, it might be a little bit movement in the margins I would expect. But of course, we are aiming to be around that numbers in the future as well, but it might be some movements before we are stabilizing the changes.

[Stefan Knutsson, Research Analyst]

Perfect. And then going to the Fuel and Material segment, I got the message that you expect a ramp-up here in Q4. But I'm also curious about how much of the needed investment that is already done at this stage? And has it affected the margins substantially so far this year?

[Camilla Hoflund]

It has not affected the margin substantially this year. And I think that we have -- quite a lot of them that are ongoing. And we will see, of course, some increase in the investment as we are also increasing the volumes for the future.

[Stefan Knutsson, Research Analyst]

Yes. Good. And then I can take my last question here regarding Scandpower. How has the new CEO settled in so far?

[Camilla Hoflund]

I think the -- that's a very nice question of you. Thank you. The new CEO has settled in very well and is working with the team, but also as you might hear on the call, we do have some some delays and postponements within some of these license sales that we, at least in our organization, we're expecting. It's not that they are disappearing, but they are pushed a little bit into the future. But I think that -- That's something we are very well aware of. And of course, we also, like I mentioned, expect fourth quarter to be improvement compared to this quarter.

[Stefan Knutsson, Research Analyst]

Yes. I know that much of the business is driven by the license sales in Scandpower, but If we look at the quarter as a whole, will you regard it as a normal quarter in terms of profitability when -- yes, when you do not have any license sales, so to speak.

[Camilla Hoflund]

Nothing we would be very, very happy about, but maybe that's kind of a realistic thing at the moment. But of course, we are working with many different initiatives, and we don't want to have as you are well aware of negative quarters in any business area. But it might take some time before you transit over to where you want to be.

[Operator]

As your next question comes from the line of Marc Webb from Quaero.

[Marc Saint John Webb, Fund Manager]

Yes. This is Marc Saint John Webb from Quaero Capital Geneva. Two questions, if I may. Firstly, just a little detail. I'm not quite sure I understood what happened in Q3 to profitability? Because I see from your accounts that you had a significant capital gain that you've discussed here of EUR 11 million on on the land sale, yet profits are down. I'm not quite sure I understand the mechanics of where profit sales -- profits fell sharply, possibly license revenues, et cetera. But if you come back on that? And secondly, sort of a bigger picture question in terms of -- we're seeing in certain countries, a bit of beginnings of a nuclear revival even talk of maybe even one day building a new plant in Switzerland. And in France, they're just about to announce the launch of 6 nuclear EPR plants going to be huge and launch of an SMR program. Just to get a bit of a feeling for Studsvik as a whole. in these new -- in this environment of nuclear reawakening where can you benefit? Are there areas that you're not currently generating revenues that could wake up?

[Camilla Hoflund]

Thank you for the question. And if I may start with a bigger picture question, and then I will hand it over to Niklas, our CFO. When it comes to the bigger picture, Yes, for sure. I mean, it's very positive, I think, for our business area and everyone in the industry with the Renaissance, we start to see and to hear about. And I think we are quite well positioned. And like I mentioned in my speech earlier, we are already talking talking a little bit and working with SMR development. So I think new concepts, new technologies, that's very good for telematerials technology and for can power. And then, of course, we have the legacy we have and we have to also make sure that we can handle the new types of waste and you routes that are coming in. So in a sense, I also believe it might be good for waste management technology. And of course, the more reactors you have in operation, of course, there will be more needs of decommissioning services. So more or less, I think all business areas can benefit, but I think the timing might be different.

[Niklas Karlsson, CFO & Member of Executive Management Group]

Yes. And maybe I can answer your question related to the growth in the operating profit in the quarter. And the main reason is actually that we are having less license sales within Scandpower, but then also, we have had quite a lot of transport projects within FMT where we have lower gross profit. So that explaining why we are dropping in the quarter.

[Operator]

Thank you. [Operator Instructions] There are no further questions at this time. Please continue.

[Camilla Hoflund]

Thank you very much, everyone, ladies and gentlemen. Thank you for listening in, and thank you, operator.

[Operator]

And that does conclude our conference for today. Thank you for participating. You may now disconnect. Speakers, please stand