Studsvik AB (publ) (SVIK) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Studsvik Q4 2019 Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today. And I would now like to hand the conference over to your speaker, Ms. Camilla Hoflund. Thank you. Please go ahead.

Thank you. Ladies and gentlemen, welcome to Studsvik interim report for year-end 2019. Let me introduce myself. My name is Camilla Hoflund, and I'm the CEO of Studsvik. And together with me, I have our CFO, Claes Engvall, and we will walk you through the Studsvik year-end report. Please turn to the Page #2. As you might be aware, Studsvik is a company working in the nuclear industry. And our main customers we define within the utility, vendors, research organizations and regulators. We also have a new initiative within radioisotope industry and the project for our customer, Elekta. Our company is listed on the Nasdaq Stockholm Small Cap with the sales around SEK 650 million, and the employees number is about 550, and we have a very global presence on the market. Please let me share the CEO review in brief. The year started very problematic, leading to urgent implementation of restructuring and cost-saving program in the business areas for Germany and Waste Management Technologies. We also have technical challenges with the implementation of the automated production line for radioisotopes in hot cell. In the quarter, we have seen the positive effect from our initiatives within the cost-saving program, restructuring of organization and commercial negotiations. The effect of these initiatives, in combination with a strong year-end performance within Scandpower, the company delivers strong results within the current period. Today's report will be presented -- would present the progress and the outcome in more detail for each of the business areas. Please turn to Page #3. Let me start to share our updated group vision and mission to you. Studsvik's vision is making it easy to benefit from clean nuclear energy. We think that's a very important statement. And that leads us to the Studsvik's mission, that is to create effective, customer-focused solutions to complex problems through Studsvik's proven ability to innovate. And I think that also states very much the company culture that we have within Studsvik. Please turn to Page #4. In brief summary, we have a strong final quarter with positive effects on sales and adjusted operating profit from the initiatives started earlier 2019. Although the strong ending of 2019, it started problematic and the full year sales and adjusted operating profit are negative compared to 2018, the cash situation has stabilized, and we expect a stepwise improvement moving forward. Please turn to Page #5. This picture illustrates our vision and mission where Studsvik as a technology company, providing innovative solutions for our industry represented by nuclear utilities, new vendors, research organization and authorities. We support safety and efficiencies with our offerings throughout the whole fuel cycle from qualification to final disposal. That is an introduction to Studsvik. And if you turn to Page #6, this is a brief current business environment status. You are aware that China is building reactors, and we expect the solution for the next year continue to be very important part of the energy industry in China. China is an important market for Studsvik, and we have many opportunities in different business areas such as fuel qualification, software and waste management. Although we are well aware of the situation and we are following the development of the coronavirus and the potential impact of any delays, of course, in our ongoing business situation with Chinese customers. In UAE, it was recently reported that the nuclear power plant in Middle East are close to commission. This might open up in the long-term opportunities for business for Studsvik in the future. Within the lifetime extension for aging nuclear power plants, Studsvik has recently launched an international 5-year OECD/NEA program to support extension programs for aging plants. The program will include material testing and characterization in our hot cell lab in Sweden. We are also closely following the trends and development of new technology such as small modular reactors. Please, if you turn to Page #7. I will now briefly talk about Fuel and Materials Technology. Troublesome year with technical and logistical issues caused by the installation of the automated isotope handling in the hot cell. We also dissolved provision for restoration cost in quarter 2 for about SEK 10 million. In the quarter 4, we produced 2 sets of the isotopes and start to be back into a more normal hot cell operation. If we make an outlook within the business area, we can say that the stability will improve over time in the hot cell. We also foresee new business in Asia, for example, within the area of fuel qualification, although there is always a risk with long-decision processes and of course following regular -- national regulation. The isotope production will ramp up and follow the commercial agreements with our customer, Elekta. Moving into Page #8. In Waste Management Technology, a very disappointing year with the total restructure and refocus of the business. A major restructuring with significant reduction of staff in U.K. and Sweden and closing of offices. Items affecting comparability is about SEK 14 million. If we have an outlook for the business area, we see that Waste Management Technology is today focusing on license business with supporting engineering services for licensing of waste plant construction and operations. We have identified prospects on the global market. But we know the lead time to close is long, and it's very difficult to predict the timing. The business area will have a SEK 10 million improvement year-on-year. Please turn to Page #9, and we have an outlook on the Scandpower business area. As often, also this year, following the previous trends and ending up with a very strong year-end performance with a positive outcome on the sales and operating profit, this year, we are also closing several sales in the quarter both in our home market in U.S. and in Asia. The outlook perspective for the business area can be stated in, to support the software business in Asia, we have opened a Chinese subsidiary to have a close presence to our customers. We have also got an approval of reclassification of export control for our software that also makes it open up for more business opportunities in countries such as China. Please turn to Page #10, our business area Germany. Moving from a very poor first half year with the too high sickness rates and inefficient operations, the management and the staff turned the operation into a profitable second half year. We see positive effects from the initiatives such as reducing the costs, renegotiation of contracts and a very strong staff commitment. The order book is full for 2020, but still we need to secure and deliver to our customers as agreed. The outlook for this business area, we see that we will have a SEK 10 million EBIT improvement year-on-year. We will continue with efficiencies and continuous improvement of the operation. And we also are focusing on the demand for engineering and radiation protection services by keeping and recruiting people into the organization. This was the summary from the business area perspective. And now I will hand it over to Claes Engvall that will talk about the financial and highlights.

Good afternoon. My name is Claes Engvall, and I'm the CFO for Studsvik, and I would like you to turn to Page #11. We have stated some financial highlights, and I would like to draw your attention that the full year adjusted EBIT is positive by SEK 4.4 million. As you are well aware, we have net items affecting comparability worth SEK 14.8 million, but net of those, we're making an underlying profit of SEK 4.4 million. I would also like to stress that there is a strong focus on cash and working capital throughout the organization. And as you will see later on, we are expecting improvements due to this work also going forward. And then I would like to comment the decision by the Land and Environment Court of Appeal is to be communicated on the 21st of February. And the recap is that we've stated in the Q3 report that we have opened up a court case against the Land and Environment Court concerning a requested bank guarantee. And we're also -- at the same time, as we are waiting for the decision by the court to be communicated on the 21st how to proceed with the proceedings, we are also looking into alternative solutions to solve the guarantee issue. I would now like you to turn to Page #12, and I will give some overall comments on the group earnings. Sales in the quarter was strong, very much depending on strong sales in Scandpower, whereas on the full year, we have losses mainly related to Germany and business area Fuel and Material Technology. EBIT, we had a good profit development also here for Scandpower as well as Germany. But for the full year, we had lower profits for all business areas, except Germany. Free cash flow, I will come back to a little bit later on and comment separately. Investments, we had investments this year worth SEK 32 million. The bulk of it is related then, of course, to the investments concerning the Elekta project and the isotopes production. Net debt has increased in percentage, which is then very much related to the weak result on the full year and the related consequences on the free cash flow. And yes, as we commented before, the average number of employees have been reduced from 625 to 554, which is very much related to Germany and the U.K. I will then like you to turn to Page #13. A short and brief explanation of the difference between Q4 2019 and Q4 2018 is that in this quarter, we had an EBIT of SEK 20.4 million, whereas in corresponding period last year, we have SEK 0.3 million. And the first major deviation is, of course, that we have improved sales in the quarter and margins, very much driven by strong sales in the quarter by Scandpower. We've seen some strong improvements also in the German profits, whereas the profit for Fuel and Material Technology is below last year. And then also, we have other areas to summarize the rest of the changes. So altogether, an improvement of 24 million -- sorry, SEK 20.7 million. And I would like you to turn to Page #14. And it's the same, but it's between the full year 2019 and the full year 2018. The loss this year was SEK 10.4 million, including items or items affecting comparability, whereas in 2018, the result was SEK 33.5 million. Major deviation is that we have lower sales this year even though we had a stable margin of around 24% on the profit -- on the gross margin. We lost roughly SEK 18 million. This year, also 2019, we had higher items affecting comparability. They amounted to SEK 14.8 million, which was an increase of SEK 5.9 million towards last year. And then also during 2018, we made a profit on the sale of the Horsvik premises of roughly SEK 14 million. And then we have other areas to summarize to SEK 6.6 million. That then explains the deviation between 2 years. So I would like you to turn to Page 15 and some overall comments on the cash flow. EBITDA, I mentioned it before, very good development in the quarter for Scandpower and Germany, whereas we had lower profits for all business areas besides Germany for the full year. Change in working capital, I spoke about an increased focus. Unfortunately, we had some customer delayed payments in the full year, but we have some improvement in the cash flow -- the working capital development for the full year. Please bear in mind that during 2018, we had a big advance from a customer order from TVEL. That explains the high number on change in working capital in 2018. Investments, I have commented on. It's very much related to the Elekta investments. Financial items listed lower financial costs since we have a new financing arrangement in place. We used to have a bond of SEK 200 million. But during Q1 2019, that will change to a bank loan of SEK 50 million and a revolving facility of SEK 100 million. That was together with Danske Bank. Others, SEK 28 million, a couple of different areas. The main one is concerning dissolved waste-related funds. So we have a free cash flow in the last quarter of SEK 7.2 million worth, whereas for the full year, it was minus SEK 38.8 million. And what we would like to comment also is that the group's total available cash as of December 31 is SEK 66 million, whereas as of December 30, it was SEK 64 million. And here, we are expecting an increase going forward. So some comments on our expectations going forward. For Fuel and Material Technology, we expect the operations to be back more towards a stable -- structured and stable operation. We also see potential to new markets, business in new markets. For Scandpower, we foresee a stable business with also business opportunities, mainly in the U.S. and China. Waste Management Technology, we foresee a SEK 10 million EBIT improvement year-on-year. That is also excluding items affecting comparability from that level. We expect the SEK 10 million improvement. And from Germany, we also expect SEK 10 million EBIT improvement year-on-year. And also here, we're going to continue to work on efficiencies. I would now like you to turn to Page #17. The risk we foresee going forward are mainly related to the technical ramp-up of the Elekta deliveries. It's related to potential trade conflicts. It's related to issues concerning export control. And it's also related to the long decision process we normally face among our customers. However, during 2020, we don't foresee at this point in time any additional major restructuring or items affecting comparability. And also, like was mentioned before, we expect an improved cash situation going forward now into 2020. That concludes the remarks from our presentation. So I would like to say thank you very much for joining in, and back to the operator now to open up for potential questions.

[Operator Instructions] And your first question comes from the line of Pål Jarness.

This is Pål Jarness here. I have a couple of questions. We can do them one by one. The export control approvals that you have reached in -- regarding the Chinese market, is that for all software? More specifically, how does it address the contract that Studsvik announced a couple of years ago that since then had been delayed pending approval? Are those now approved? Or is this a different software?

Thank you, Pål Jarness, and Camilla Hoflund here. I will answer the question. Regarding the software that was -- the pending export control that has been canceled due to the long delay with the customers, so still we are reengaging with the customers to restart the process and to, of course, try to close the business in near future. And then a little bit more specifically on the export control, the reclassification is from Department of Energy 10 CFR 810 classification to a Department of Commerce 15 CFR 744 and for all softwares but not for engineering services at this point in time. So this is for the softwares, all the softwares we have, which means...

Promising. Congratulations to that sort of breakthrough, at least.

Thank you.

Can I continue with the second question?

Please.

It's about the -- you say in both Waste Treatment Technology and also for Germany, you say SEK 10 million improvement year-on-year. If we take the example of Waste Treatment Technology where you have an adjusted profit for 2019 on minus SEK 20 million, then we would expect then minus SEK 10 million, I guess, in 2020? Is that then going to be breakeven in 2021? Or how do you sort of -- what do you mean with the year-on-year? Is that SEK 10 million improvement for each year going forward?

I think we can say like this. Claes Engvall here. I think we can say like this, yes, your calculation is quite right. The numbers are quite right. What we have highlighted is that we are focusing now very much on the license business. That's a very, very important part of the business going forward. And then, of course, a general comment is that nobody is satisfied with a business that's running on a loss.

Okay. I was just wondering since we're doing SEK 20 million this year and then if we expect a minus SEK 10 million next year, then at least I would hope for a profit in 2021?

No, I think that, as you probably understand, we are planning on to further activities.

[Operator Instructions] Our next question comes from the line of Pål Jarness.

Sorry, I seem to be the only one with questions. When it comes to the decision of the Land and Environment Court, can you comment whether that is solely a guarantee issue? Or is it also something that relates to either P&L, i.e., whether it be a significant cost other than the cost of the action guarantee? And will there be any cash flow impact out of that? Is there any risk for sort of profit impact or cash flow impact that is significant?

Yes, what we have decided to communicate since it's an ongoing court case is that we will have the decision whether we should proceed or not on the 21st of February. So as of today, this is a court case. It's, from our point of view, pure speculation. But we are looking into other alternative solutions. I think that is what we can say today. And then, of course, during the next earnings call, we'll give you an update of the actual outcome.

[Operator Instructions] And your next question comes from the line of [ Linus Stockelberg ].