Earnings Call: Q4 2019

Feb 13, 2020

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Starzbank Q4 twenty nineteen Conference Call. At this time, all participants are in a listen only mode. There will be a presentation and a follow-up question and answer session. 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. Tamil Huffland. Thank you. Please go ahead. Thank you. Ladies and gentlemen, welcome to Interim Report for Year End 2019. Let me introduce myself. My name is Tamila Hoffland, and I'm the CEO of Susvik. And together with me, I have our CFO, Claus Engbang, and we will walk you through the Susvik year end report. Please turn to the Page number two. Now as you might be aware, Zoosvik is a company working in the nuclear industry, and our main customers will be fine within the utility, vendors, research organizations, and regulators. We also have a new initiative within radioisotope industry and the project for our customer, Alexa. Our company is listed on the NASDAQ stock forecast with the sales around $650,000,000 and the employees' number is about SEK $550,000,000, and we have a very global presence on the market. Please let me share the CEO view in brief. The year started very problematic, leading to urgent implementations of restructuring and cost saving program in the business areas for Germany and Waste Management Technologies. We also had technical challenges with the implementation of the automated production line for radioisotopes in hotels. In the quarter, we have seen the positive effects 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 Scan Power, the company delivers a strong result within the current period. Today's report will be presented will present the progress and the outcome in more detail for each of the business areas. Please turn to page number three. Let me start to share our updated group vision and mission to you. Suttrick'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 SysTick mission that is to create effective customer focused solutions to complex problems through Sysdig's proven ability to innovate. And I think that also states very much the company culture that we have within Sysdig. Please turn to Page number four. 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 is stabilized, and we expect a stepwise improvement moving forward. Please turn to Page number five. This picture illustrates our vision and mission, whereas CIFRIC as a technology company providing innovative solutions for our industry represented by nuclear utilities, field vendors, research organizations, and authorities. We support safety and efficiency with our offering throughout the whole fuel cycle from qualification to final disposal. That is an introduction to STOOTSIG. And if you turn to Page number six, it is a brief current business environment status. You are aware that China is building reactors, and we expect the solutions of the nuclear continue to be very important part of the energy industry in China. China is an important market for Stutzik 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 plants in Middle East are closed to commission. This might open up in a long term opportunities for business for Stutzik in the future. Within the lifetime extension for an aging nuclear power plant, Stutzik has recently launched an international five year OSDDMIA program to support extension programs for aging plants. The program will include material testing and characterizations in our hostel lab in Sweden. We are also closely following the trends and development of new technologies such as small modular reactors. Please, if you turn to Page number seven. I will now briefly talk about Fueling Materials technology, troublesome year with technical and logistical issues caused by the installation of the automated isotope handling in the hot cell. We also resolved provision for restoration costs in quarter two for about 10,000,000. In the quarter four, we produced two sets of the isotopes and start to be back into a more normal hostel operation. If we make an outlook within the business area, we can state that the stability will improve over time in the hotel. We also foresee new business in Asia, for example, within the area of your qualification. Although there is always a risk with long decision processes and of course following regular national regulations. The isotope production will ramp up follow the commercial agreements with our customer, Alexa. Moving into Page number eight and Waste Management Technologies, a very disappointing year with the total restructure and refocus of the business. A major restructuring with significant reduction of staff in UK and Sweden and closing of offices. Items affecting comparability is about SEK 14,000,000. If we have an outlook for the business area, we see that Waste Management Technology is today focusing on licensed business with supporting engineering services for licensing of our waste plants, construction and operation. We have identified prospects on the global market that we know the lead time to close is long and it's very difficult to predict the timing. The business area will have SEK 10,000,000 improvement year on year. Please turn to Page nine, and we have an outlook on the Scanpower business area. As often also this year is 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 on our home markets in US and in Asia. The outlook perspective for the business area can be stated in to support the software business in Asia. Have opened the Chinese subsidiaries to have a close presence to our customers. We have also got an approval of reclassification of export control for our software, which that also makes it open up for more business opportunities in countries such as China. Please turn to Page number 10, our business area, Germany. Moving from a very poor first half year with the too high sickness rates and an inefficient operation, 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 SEK 10,000,000 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 Klaus Engel, who will talk about the financial and highlights. Good afternoon. My name is Klaus Engel, and I'm the CFO for Strategic. And I would like you to turn to Page 11. We have stated some financial highlights. I would like to draw your attention to that the full year adjusted EBIT is positive by SEK 4,400,000.0. As you are well aware, we have net items affecting comparability of SEK 14,800,000.0, but net of those, we're making an underlying profit of SEK 4,400,000.0. I would also like to stress that there's 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 Air Rent and Court of Appeals is to be communicated on the February 21. And just to recap is that we stated in the Q3 report that we have opened up a court case against the Land and Environmental 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 twenty first, if there's how to proceed with the proceedings, we are also looking into alternative solutions to solve the guarantee issue. I would now like 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 Scan Power, whereas on the full year, we had losses mainly related to Germany and Business Area Fuel and Material Technology. EBIT, we had a good profit development also here for Scan Power as well as Germany. But for the full year, we had lower profits for all business area, except Germany. Free cash flow, I will come back to a little bit later on and comment separately. Investments, we had investments this year of SEK 32,000,000. The bulk of it is related then, of course, to the investments concerning the Elekta projects and the isotope production. Net debt has increased in percentage, which is then very much related to the weaker result on the full year and the related consequences on the free cash flow. And as we commented before, the average number of employees has been reduced from €625,000,000 to $554,000,000 which is very much related to Germany and The UK. I would then like you to turn to Page 13. A short and brief explanation of the difference between Q4 twenty nineteen and Q4 twenty eighteen is that in this quarter, we had an EBIT of 20.4%, whereas in corresponding period last year, we had 0.3%. 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 Scanpower. 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, have other areas to summarize the rest of the changes. So altogether, an improvement of SEK 24,000,000 sorry, SEK 20,700,000.0. And I would like 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 10,400,000.0, including accounting items or items affecting comparability, whereas in 2018, the result was EUR 33,500,000.0. Major deviation is that we had 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 18,000,000. This year, also 2019, we have higher items affecting comparability. They amounted to SEK 14,800,000.0, which was an increase of 5,900,000.0 towards last year. And then also during 2018, we made a profit on the sales of the Horswik premises of roughly SEK 14,000,000. And then we have other areas to summarize to SEK 6,600,000.0. That then explains the deviation between two years. So I'd like you to turn to Page 15 and some overall comments then on the cash flow. EBITDA, I mentioned it before, very good development in the quarter for Scan Power in Germany, whereas we had lower profits for the business area besides Germany for the full year. Changes in working capital, I spoke about an increased focus. Unfortunately, we had some customer delayed payments in the full year, but we had some improvements in the cash for 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 twelve. That explains the high numbers on changes in working capital in 2018. Investments, I have commented on, is very much related then to the Elekta investments. Financial items, a little bit lower financial costs since we have a new financing arrangement in place. We used to have a bond of SEK 200,000,000. But during Q1 twenty nineteen, that's a change to a bank loan of 50,000,000 and an revolving facility of SEK 100,000,000. That was together with Danske Bank. Others, SEK 28,000,000, 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 7,200,000.0, whereas for the full year, it was minus SEK 38,800,000.0. And what we would like to comment also is that the group's total available cash as of December 31 is SEK 66,000,000, whereas as of December 30, it was SEK 64,000,000. And here, we're 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 structure and a stable operation. We also see potential for new markets business in new markets. The Scanpower, foresee a stable business with also business opportunities, mainly in The U. S. And China. The Waste Management Technology, we foresee a SEK 10,000,000 EBIT improvement year on year. That is also excluding items affecting comparability from that level. We expect SEK 10,000,000 improvement. And from Germany, we also expect SEK €10,000,000 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 risks we foresee going forward are mainly related to the technical ramp up of the Electro deliveries. It's related to potential trade conflicts. It's related to issues concerning export control. And is 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. Thank you, ladies and gentlemen. We will now begin the question and answer session. And your first question comes from the line of Paul Harness. Your line is now open. Hello. This is Paul Harness 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? And more specifically, how does it address the contract that Stutzik announced a couple of years ago that since then have been in delay pending approval? Are those now approved? Or is this a different software? Thank you, Pouljarnas. And Camilla Hulen here. I will answer the question. Regarding the software that was in the pending export control that has been canceled due to the long delay with the customers. But still, are reengaging with the customer 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 eight ten classification to the Department of Commerce 15 CFR seven forty four and for all softwares, but not for engineering services at this point in time. But this is for the software, all the softwares we have. Progressing, thank you. Congratulations to that sort of breakthrough at least. Thank you. Can I continue with the second question? Please. That's about the new safe in both waste treatment technology and also for Germany, you say EUR 10,000,000 improvement year on year. If you take the example of waste treatment technology where you have an adjusted profit for 2019 of minus EUR 20,000,000, then we would expect then minus 10, I guess, in 2020. Is that then going to be breakeven in 2021? Or how do, how do you sort of what what do you mean with a year on year? So 10,000,000 improvement for each year going forward? I think we can say like this, Klaus and I will say so here. I think we can say like this. Yes, your calculation is quite right. The numbers are quite right. But what I 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 €20,000,000 this year and then if we accept the minus €10,000,000 next year, then at least I would hope for a profit in '20 No, I think '20 that as you as you probably understand, we we are planning also for other activities. Okay. Thank you. Thank you. Your next question comes from the line of Paul Jarnes. Sorry, I seem to be the only one who questions. When it comes to the decision of the Land and Environmental Court, can you comment whether that is solely a guarantee issue? Or is it also something that relates to either P and L, I. E, whether it be significant cost other than the cost of the actual 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 this is an ongoing court case is that we will have the decision whether we should proceed or not on the February 21. 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 will give you an update of the actual outcome. Thank you. Thank you. And your next question comes from the line of Linus Stockholmberg. Your line is now open. Yeah. I have a question regarding the the Elekta order. Can you say anything about the the gross margin on the order? And and second one sorry. When do you sorry? Yes. Please continue. Take the second question too. Yeah. And when do you expect to make a profit on the order? Yes, those two questions. The first question is that we can't disclose, as you probably understand, on the business agreements, which also means that we can't disclose any margin from the business. But of course, this is a business that we foresee as beneficial both for us and for Elekta. So that is what we can say on the profit one. And of course, I think this year or 2019, this has not been profitable for us. As you have read in our reports, the start up of the Elekta project has meant a lot of issues with the rest of the organization. We have seen a lot of disturbances in fueling HL technology due to problems with the first phase of the Lekka startup. Over time, and of course, we can't really disclose when we start to make a profit, but this is a big contract for us. It's running for several years. It's roughly SEK 400,000,000, and we are right now in a ramp up phase. But what we can say is that the bulk, the absolute majority of the investments are already involved. We have the production and equipment we need in place to cover the full agreement. Eli, just a follow-up on the investment. How big is it? I did some calculation, about €110,000,000 in total? Or how much approximately? The calculation is less than €30,000,000 Okay. So the order is €400,000,000 approximately, and the investment is €30,000,000 In production equipment, yes. Yes. Okay. And then you have Sorry. Just to clarify that. But please bear in mind also that the specific investment for the Elekta project is 30,000,000. But, of course, we already have a hot sale to start with, which is about the investment, so. Yeah. Yeah. But that's already been done. I mean yeah. Okay. Yeah. Exactly. Exactly. And then you have the, what do you call it, the earlier cost number. I mean, yeah, I I I understand we can't specify them. But The direct cost for that, towards the people and sell rent, etcetera, and other equipment, of course. Yes. How many people are involved in the in the order? It will be a movable target that we are ramping up, so it's not so easy to quantify exactly today. Okay. Alright. Okay. Thank you. Thank you once again. There are no further questions that came through. Please continue. Okay. So if there are no further questions from our point of view, we would like to say thank you very much for joining in on our call. And we will continue to work, of course, and hopefully, we will have an interesting update for you also for Q1. And we all hope you can join also for Q1. So again, thank you very much for joining today. Thank you. Thank you. That does conclude our conference for today. Thank you all for participating. You may now disconnect.